Love, Money + Real Estate #80 Student loans, auto loans, mortgages: how America's borrowing crisis is hitting the same households and deliquencies are rising
One thing worth adding to the borrower side of the equation: understanding the nuanced but critical difference between how much a lender will lend and how much a borrower can actually afford to borrow.
A lender's job is to maximize loan value without forcing a default. Their math stops at LTV ratios and debt-to-income thresholds. It doesn't account for the full picture of a borrower's financial life. The data in this piece shows exactly what happens when borrowers conflate "approved" with "affordable."
Your practical suggestions for borrowers already carrying too much debt are spot on. And going forward, change the question we ask ourselves from: "How much will they lend me?" to "How much can I comfortably repay?"
Thanks for this, Cosmo. And, you're right. A lender looks at a credit history and one of the shortcomings of that process is a credit history only accounts for about 20-30% of your financial life. It's a poor substitute for a personal balance sheet -- otherwise known as the income, expenses, savings and investments the borrower has.
I also echo your sentiment on changing the question all borrowers should consider: As I say in all of my books, lenders will give you enough rope to choke yourself. Instead, think about your life and lifestyle, who you support, and what it comfortably takes to support those folks. If you're already living paycheck to paycheck, find a way to bring in more income or cut back on expenses before taking on more debt.
Couldn't agree with this more. "How much will they lend me?" to "How much can I comfortably repay?" This should be stressed more at the beginning of every real estate transaction, both from the lender and the real estate agent helping the buyer.
Yup. Not enough people think about how much it costs them to live their entire lives. And, that has the potential to position your finances right at the edge of the cliff.
I'm the first to admit I'm on the upper 'stick' of our K economy. I can at least understand and respect what's going on for the lower 'stick'. At the same time, I wonder if we're starting to treat loans like Congress treats the national debt. Which leads to my question...at what point do we as a country get in trouble as a whole with all this unpaid debt?
Jim - That's a great question. I think the answer is we're already there.
We're already cutting social services, reducing everything from SNAP to Medicaid support while our borrowing increases. As for other kinds of trouble, we'll have to see what happens when lenders start raising interest rates on our debt. I'm sure that's coming, too.
Regarding auto loans, lenders appear relatively comfortable with this current trajectory. The median credit score for auto fell slightly QoQ, from 724 to 716 which points to an openness to more lower-credit lending. Ally Financial in their quarterly earnings, for instance, talked about the resilience of the consumer, and specifically cited strong auto financing results. They cited falling net charge offs which seems in-line with the Fed's data that there is a shrinking pass-through of loans to the 30+ days delinquent status.
I take those details as a good sign that some of the worst delinquency issues may be behind us.
Everyone's happy - until they're not. I do believe that there is a growing upper-middle class that's doing really well. But, our young people are mostly who fall into the category of "too much debt" and in particular "too many student loans."
And then there's this: unemployment is still relatively low. What happens when people start losing their jobs?
One thing worth adding to the borrower side of the equation: understanding the nuanced but critical difference between how much a lender will lend and how much a borrower can actually afford to borrow.
A lender's job is to maximize loan value without forcing a default. Their math stops at LTV ratios and debt-to-income thresholds. It doesn't account for the full picture of a borrower's financial life. The data in this piece shows exactly what happens when borrowers conflate "approved" with "affordable."
Your practical suggestions for borrowers already carrying too much debt are spot on. And going forward, change the question we ask ourselves from: "How much will they lend me?" to "How much can I comfortably repay?"
Thanks for this, Cosmo. And, you're right. A lender looks at a credit history and one of the shortcomings of that process is a credit history only accounts for about 20-30% of your financial life. It's a poor substitute for a personal balance sheet -- otherwise known as the income, expenses, savings and investments the borrower has.
I also echo your sentiment on changing the question all borrowers should consider: As I say in all of my books, lenders will give you enough rope to choke yourself. Instead, think about your life and lifestyle, who you support, and what it comfortably takes to support those folks. If you're already living paycheck to paycheck, find a way to bring in more income or cut back on expenses before taking on more debt.
Appreciate you sharing your thoughts!
glink.substack.com
Couldn't agree with this more. "How much will they lend me?" to "How much can I comfortably repay?" This should be stressed more at the beginning of every real estate transaction, both from the lender and the real estate agent helping the buyer.
Yup. Not enough people think about how much it costs them to live their entire lives. And, that has the potential to position your finances right at the edge of the cliff.
I'm the first to admit I'm on the upper 'stick' of our K economy. I can at least understand and respect what's going on for the lower 'stick'. At the same time, I wonder if we're starting to treat loans like Congress treats the national debt. Which leads to my question...at what point do we as a country get in trouble as a whole with all this unpaid debt?
Jim - That's a great question. I think the answer is we're already there.
We're already cutting social services, reducing everything from SNAP to Medicaid support while our borrowing increases. As for other kinds of trouble, we'll have to see what happens when lenders start raising interest rates on our debt. I'm sure that's coming, too.
Thanks for weighing in.
Regarding auto loans, lenders appear relatively comfortable with this current trajectory. The median credit score for auto fell slightly QoQ, from 724 to 716 which points to an openness to more lower-credit lending. Ally Financial in their quarterly earnings, for instance, talked about the resilience of the consumer, and specifically cited strong auto financing results. They cited falling net charge offs which seems in-line with the Fed's data that there is a shrinking pass-through of loans to the 30+ days delinquent status.
I take those details as a good sign that some of the worst delinquency issues may be behind us.
Everyone's happy - until they're not. I do believe that there is a growing upper-middle class that's doing really well. But, our young people are mostly who fall into the category of "too much debt" and in particular "too many student loans."
And then there's this: unemployment is still relatively low. What happens when people start losing their jobs?