More people holding auto loans are behind in their payments, leading some to question whether rising auto loan delinquency is an economic indicator and others to suggest poor lending practices are to blame.
According to Bloomberg News, the number of auto loans at least 90 days late exceeded 7 million at the end of 2018, the highest total in the two decades that the Federal Reserve Bank of New York has tracked the data.
The purchase of a car is typically a person’s or family’s second-largest expense after a home mortgage. Becoming delinquent – 3 months or 6 months behind on a car payment – or defaulting on an auto loan is a sure sign of financial problems.
At the Sasser Law Firm, we suggest that those who are delinquent on payments for a car loan and do not have money to catch up or who are in danger of defaulting should seek financial counseling and consider whether bankruptcy is a valid option. Our bankruptcy attorney can meet with you for a free consultation to review your financial situation and advise you of your best options. Don’t put off contacting us if you are having problems with an auto loan or other debt.
Auto Loan Delinquency vs. Default of a Loan
Do not confuse auto loan delinquency with being in default of an auto loan. There is a big difference.
The definition of auto loan delinquency is being late with a payment on a car loan. How delinquent a borrower depends on how long the borrower’s total past due amount has gone unpaid.
For example, a customer who has made consistent, timely payments on their auto loan but is more than 30 days late on the current payment would be classified as 30 days delinquent on their loan. Auto loan delinquency ends if you pay the total past-due amount.
Being in default on an automobile loan is a more serious situation. It means that the terms of the loan agreement have been broken, specifically terms regarding timely payments on the loan. A borrower goes into default when he or she does not pay anything over the course of several payment due dates.
Every loan has its own rules regarding default, but a default on a car loan typically occurs when there has been no payment on a loan for 60 to 120 days and the borrower is more than 2 months behind on a car payment.
The lender may notify the borrower in default that the loan agreement has been terminated because of nonpayment and may proceed to repossess the vehicle. No prior notice is required prior to the repossession occurring.
Why are More Americans Behind in their Car Payments?
The report from the Federal Reserve Bank of New York says more Americans than ever were at least 3 months behind on their auto loans in the last quarter of 2018. In all, more than 7 million car loans were past due by at least 90 days. That’s 1.3 million more past-due loans than during the previous peak in 2011, when the unemployment rate was twice as high as it is now. At the time, we were coming out of the Great Recession, CNN Business says.
About 4.5 percent of all car loans are delinquent today. That’s lower than at the end of the recession, when the rate rose to 5.3 percent at the end of 2010. But, CNN Business says, the rate has increased in all but two quarters since early 2015.
Meanwhile, unemployment is at record lows and most observers say America is enjoying a strong economy. So, what’s going wrong?
Maybe the economy is not as strong as advertised. “The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector,” the Fed says on its Liberty Street Economics blog.
“Consumer pain tends to be a leading indicator for broader economic struggles: An increase in delinquencies could signify waning consumer health, foreshadowing a drop in confidence and an overall spending slowdown, which affects nearly every industry,” Business Insider says.
There is an increasing trend towards auto loan delinquency
A Bankrate analyst suggests that auto loan delinquencies are an accurate measure of financial strain because the payment is not flexible, while credit cards offer “minimum payments” that consumers may fall back on when money is tight. And, historically, people keep up with car loans because a car is critical to everyday life, and instead let credit card debt or mortgage payments slide, Business Insider says.
But while auto loan delinquency is climbing, both credit card and mortgage loan delinquencies are at historically low levels.
It may be that there are too many auto loans outstanding, and too many held by people who cannot afford them. The Fed says that with growth in auto loan participation, there are more subprime auto loan borrowers than ever, and thus a larger group of borrowers at high risk of delinquency.
Mark Hamrick, a senior economic analyst at Bankrate, explains that buyers with poor credit histories end up paying more to finance car loans.
“Many borrowers who aren’t well qualified, meaning they have low credit scores, have been paying higher interest rates on their auto loans, making it additionally challenging for them to not only pay off the loan but capture equity in the vehicle,” Hamrick says.
As borrowers number increase, the auto loan bubble gets bigger
Borrowers younger than 30 years old are having the toughest time, with a sharp worsening in delinquencies among that age group from 2014-2016. Student debt, which totals $1.5 trillion in the U.S., may play a role, the Fed says.
But the Fed report also says most auto loans in 2018 went to better-qualified borrowers, and total car loan originations climbed to a record $584 billion last year.
Meanwhile, car prices and finance rates continue to climb, making it harder to afford a new car. Consumers paid an average of more than $36,000 for a new vehicle last year, up roughly 3 percent, Bloomberg says.