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Key Takeaways:

• Auto Debt’s Illusion: Seven-year car loans now account for 21.6% of all new U.S. auto financing, more than double their share in just eight years. What looks like affordability is actually a sign of households being financially stretched.
• Britain’s Gilt Crisis: U.K. 30-year gilt yields have surged to their highest level since 1998, forcing the government to refinance its debt at crippling costs. Bond markets are calling Britain’s fiscal bluff.
• China’s Banking Strain: Chinese banks’ net interest margins have collapsed to a record low of 1.42%, while loan losses climb. Policymaker pressure to lend cheap is leaving lenders increasingly fragile.

U.S. Auto Debt: The Illusion of Affordability

• Seven-year car loans now make up over one-fifth of new financing - double their share in just eight years – and a sign households continue getting stretched thin. 
  
  
• What looks like short-term affordability is really long-term fragility via buyers risking negative equity, ballooning interest costs, and debt service eating away at income.

What you need to know: Seven-year car loans now make up 21.6% of all new auto financing as stretched buyers chase smaller monthly payments over longer debt¹. 

Why it matters: The surge in seven-year loans isn’t a sign of consumers getting more flexible - it’s a red flag that households are so stretched they can’t afford shorter terms. Car prices are too high and disposable incomes too weak, and families are reaching for affordability by pushing debt further into the future. The risk is negative equity as buyers end up owing more than their cars are worth, leaving them trapped if job losses rise or resale values fall. What looks like a solution to high prices is really just a symptom of an economy running on ever-more debt. 

Now the Deep Dive: I’ve written before about fragility in the U.S. auto sector - from surging missed payments (late car payments are at their highest in 30 years) to carmakers facing margin squeezes.

But a year later, the picture is even darker². For instance:

• Auto debt is massive: Americans now owe $1.66 trillion in car loans, the second-largest debt category after mortgages.
  
  
• Payments are rising: Average monthly bills hit $745 for new cars and $521 for used, further eroding incomes.
  
  
• Delinquencies are climbing: More than 5% of loans are 90+ days late, up 13% from last year (varying significantly by state - ranging from 3.2% to 9.8%).

No doubt these are all symptoms of the same disease – too much debt, declining wage growth, and higher inflation.

But what’s most troubling is the surge in seven-year (84-month) car loans. . .

Why? Because it shows consumers are willing to pay thousands more in interest just to stretch out payments they can actually manage.

• The average interest paid on an 84-month loan is about $15,460, which is +$4,600 more than on a standard five-year loan.

I call this the “illusion of affordability” – aka the monthly payment looks smaller, but the total cost quietly balloons.

And making matters worse, this illusion isn’t new.

For example, seven-year loans now make up over 21.6% of all new-vehicle financings in Q2 2025 – a record high.

• That share has more than doubled in just eight years – showing that this has been a festering wound for a while now. Not something that’s just started.

Soon we’ll likely see 96-month car loans and 40-year mortgages as the new normal. Because the more stretched households become, the longer the loans they choose - and the more fragile the consumer grows with disposable income eaten alive by debt service costs.

Thus, when the next downturn hits, millions risk being “upside down” - aka owing more than their cars are worth - while still chained to payments they can’t escape.

Worse is that this isn’t just bad personal finance. It’s a slow bleed for the broader economy - because fragile consumers can’t spend, and a nation built on consumption can’t grow.

It’s death by a thousand paper cuts - and the cuts are getting deeper.

But as usual, time will tell.

Figure 1: Bloomberg, August 2025

Britain’s Gilt Meltdown: A G7 Economy Under Fiscal Strain

• U.K. 30-year gilt yields have surged to their highest since 1998 - now 15x higher than 2020 lows - forcing Britain to pay dramatically more just to refinance old debt.
  
  
• Years of runaway spending, rising debt, and stagnant growth are colliding, leaving the U.K. looking less like a global financial hub and more like an emerging market rolling over loans to survive.

What you need to know: The sell-off in U.K. bonds (aka gilts) has driven 30-year yield to its highest level since 1998 – forcing the debt-dependent U.K. government to pay substantially more to borrow³.

Why it matters: Bond markets don’t lie. Rising yields dictate what a government pays to keep the machine running. For the U.K., exploding debt and stagnant growth is a toxic mix. Higher borrowing costs are crowding out everything else - like public services, investment, and even future growth. That pressure bleeds into currency markets, consumer confidence, and the daily lives of households that are already stretched thin. 

Now the Deep Dive: Yes, it’s true that most developed markets – like the U.S., Germany, Japan, Canada, etc. - are wrestling with higher yields. But the U.K. is taking the worst of it, with 30-year gilts pushing toward 6%.

And honestly, it shouldn’t come as a surprise.

The U.K.’s fiscal math is ugly, and the bond market is starting to realize it.

Here’s the gist why:

1. Runaway spending - Government spending is set to cross 60% of GDP - up from 53% during the pandemic - while revenue drifts below 40%. That’s the U.K.’s own fiscal forecast⁴.
   
   
2. Overwhelming Debt - By 2073, debt is projected at a staggering 274% of GDP (meaning that the debt is almost triple the size of the economy it’s backed by), with annual deficits near 21% of GDP. Interest costs alone could swallow ~13% of GDP.
   
   
3. People Getting Poorer: Britain’s GDP per capita hasn’t recovered since 2019, meaning the average citizen is worse off than before the pandemic⁵.
   
   
4. Stubborn Inflation - July inflation came in at 3.8% and is expected to climb higher, far above the 2% target.
   
   
5. Policy Conundrum - Despite the sticky (and rising) inflation, the Bank of England has cut rates five times since August 2024 (from 5.25% to 4%) - pressured by a wave of corporate insolvencies (the worst since 2008-09)⁶ and debt service costs of £107 billion (3.9% of GDP).

So, it’s no wonder yields have surged to their highest in 27 years.

“Sure, 6% seems like a lot – but is it that bad in this post-COVID inflationary world?”

Good point. But the 6% isn’t the problem. It’s the massive rate of change over the last few years that’s shocking the U.K. economy.

To put it into perspective:

• 30-year gilt yields are now 15x higher than their 2020 low.
• That means the government must pay 15x more to roll its debt over.
• But on the flip side, investors who step in today are getting paid 15x more - if they’re willing to bet the U.K. doesn’t completely implode.

Britain – the banking hub of Europe and the 6^th largest economy in the world - is looking more like an emerging market stuck rolling over debt just to stay afloat vs. the world power it’s supposed to be.

But keep in mind – Britain issues bonds denominated in the pound. Which they control (and is a global reserve currency). Thus, if worse comes to worst, they wouldn’t technically default as they can print the very money the bonds are denominated in (but the value of the currency would sink, hurting creditors).

Years of structural rot – like extremely low productivity, high inequality, de-industrialization, and dependence on foreign-owned infrastructure - are now colliding with fiscal reality.

The bond and currency markets have woken up. And they’re finally calling Britain’s bluff. 

Figure 2: The Guardian, September 2025 

China’s Banking Squeeze: Fragile Margins and Rising Loan Losses

• Net interest margins have collapsed to a record low of 42%, leaving banks barely profitable while bad loans surge.
  
  
• Policymakers are forcing banks to lend cheap to fuel growth - but every cut weakens them further, turning lenders into casualties of China’s slowdown.

What you need to know: China’s giant state-owned banks are being squeezed as loan-loss provisions climb and net interest margins fall to a record low - a sign of the growing strain in their role propping up the world’s second-largest economy⁷. 

Why this matters: When China’s mega-banks slash loan rates to record lows under pressure from policymakers, it’s not a sign of strength but of strain. The PBOC’s rate cuts are meant to stoke consumption and offset the drag from tariffs, yet they are squeezing bank margins to unsustainable levels, piling risk onto institutions already setting aside more for loan losses. In effect, banks are being forced to prop up demand in a slowing, debt-heavy economy while suffering from it. 

Now the Deep Dive: China’s banking system is looking extremely worrying as banks are now being bled dry – stuck slashing interest rates lower and lower to outcompete each-other as well as dealing with loan losses as debtors default.

Long story short - net interest margin (NIM) is basically the profit banks make from lending.

• NIM = Interest earned on loans (Revenue) – Interest paid to depositors (Cost).

Thus, when that gap shrinks - as it has in China to an anemic 1.42% - banks are barely making anything on each yuan they lend.

• This is well below the 1.8% threshold regarded as necessary for maintaining reasonable profitability – meaning they’re essentially running their core business at breakeven while still carrying rising risks from bad loans.

It’s like running a store where your markup keeps getting thinner - you still move goods, but the profit on each sale evaporates.

In this case - for banks - that means less cushion against losses from bad loans.

And those losses are mounting. . .

For instance, non-performing consumer loans at China’s top five banks jumped nearly 20% since end-2024 - while bad credit card debt climbed more than 9%⁸.

• Such a squeeze is already showing up in earnings as combined profits at China’s commercial banks fell 7.7% year-over-year to 1.2 trillion yuan in the first half of 2025 - the first decline since the depths of the 2020 COVID shutdown.

So - why have banks bled out?

Well, loan demand has dried up, real estate has collapsed, and policymakers keep leaning on banks to lend cheap to prop up growth.

Put simply, Chinese households were tethered to property values. And as those prices crashed, families quickly went into survival mode - saving more, borrowing less, and paying down debt faster.

• I covered all this last in January 2024 in “China’s Balance Sheet Recession: Is the World’s #2 Economy Stuck in a Debt Trap?” – and I believe my thesis still stands.

All this results in lower margins, higher risks, and profitability now putting the banking system on life support.

The point is, banks have become direct casualties for a slowing, debt-heavy economy. And the more stimulus Beijing tries to pump in by cutting rates, the weaker they become.

Remember, banks are fragile by design. So don’t be surprised if they shatter. 

 Figure 3: S&P Global Intelligence, May 2025

Anyway, who knows what will happen?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things.

Enjoy the rest of your weekend.

Sources:

1. Surging Car Prices Push Buyers to Take Out Longer Auto Loans - Bloomberg
2. Household Debt and Credit Report - FEDERAL RESERVE BANK of NEW YORK
3. Pressure rises on Reeves as government borrowing costs hit 27-year high | Economics | The Guardian
4. Fiscal risks and sustainability – July 2025 - Office for Budget Responsibility
5. United Kingdom GDP per capita | Trading Economics
6. Commentary - Company Insolvency Statistics May 2025 - GOV.UK
7. Top Chinese state banks' interest margins hit new lows - Nikkei Asia
8. China Banks Pressured by Rising Loan Losses, Low Margins - Bloomberg

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