Auto loan delinquencies hit highest in 19 years

More Americans are falling behind on one of their biggest financial obligations, and this is a confusing trend in light of a strong economy and jobs situation.

Some 7 million Americans are 90 days or more behind on their auto loan payments, according to new data released by the Federal Reserve Bank of New York. The number of delinquent loans has been trending steadily upward since 2011 and reached the highest level in the bank’s 19-year history of loan origination data.

“That’s over a million more troubled borrowers than there were at the end of 2010, when overall delinquency rates were at their lowest,” Fed economists wrote from New York in a blog post.

The economy is strong, so why are defaults on the rise?

Most auto loans taken in 2018 to what the Fed describes as the “most creditworthy individuals” or those with a credit score of around 720. But borrowers with a credit score below 620 had rates of delinquencies greater than 8% in the fourth quarter of last year. The New York Fed finds the development “surprising” given the strength of the economy and labor market.

“The overall performance of auto loans has slowly deteriorated, despite an increasing share of blue chip loans in the stock,” New York Fed economists wrote in a blog post. “The substantial and growing number of troubled borrowers suggests that not all Americans have benefited from the strength of the labor market and warrants continued monitoring and analysis of this sector.”

A recent Bankrate poll found that most Americans haven’t gotten a raise in the past year. The average October 2018 salary had roughly the same purchasing power as 40 years ago, according to Pew Research. As costs such as healthcare and childcare continue to rise, wages are struggling to keep up.

Chief financial analyst Greg McBride at Bankrate says auto loan delinquencies are an accurate measure of financial stress.

“Unlike other forms of borrowing, like a credit card where the consumer can get back to a minimum payment if things are tight, with a car loan there is no wiggle room,” says McBride. . “A monthly payment of $ 500 for a car is a monthly payment of $ 500 for a car.”

In the fourth quarter, auto loans in “serious delinquency”, or those that became past due for more than 90 days, jumped to 2.4%. The New York Fed points out that this is a substantial jump from the 1.5% low in loans on the same measure in 2012.

Young Americans struggle the most with auto loans. Data shows that delinquencies on auto loans held by borrowers under 30 have slowly increased over time, and the New York Fed says there is a “sharp worsening” in delinquencies in this group of years. Age from 2014 to 2016. Student debt may play a role as young Americans and their parents face the repayment of $ 1.5 trillion in education loans.

Another important finding from the bank is that loans from auto finance companies are more likely to become delinquent than loans from auto dealers. According to the data, 6.5% of auto finance loans are over 90 days past due, with only less than 1% of loans issued by dealers in arrears.

The bank says more than 50 percent of auto loans go to subprime borrowers with credit scores below 620. Mark Hamrick, senior economic analyst at Bankrate, notes that these buyers end up paying more to finance their groceries.

“Many borrowers who are not well qualified, which means they have poor credit scores, have paid higher interest rates on their auto loans, which also makes them difficult not only to repay the loan. , but also to capture the equity of the vehicle, ”explains Hamrick. “There is something about the attractiveness of automobiles that causes too many buyers (and borrowers) to not research enough for the best loan as well as the best deal on a vehicle.”

How to avoid falling behind on your car loan

Hamrick says the takeaway for consumers on New York Fed data starts with being smart during the buying process.

“[The main point] should be something on the initial point of purchase, both in terms of shorter loan term, sufficient down payment and a cheaper vehicle, including used, ”Hamrick said. “You can always consider refinancing a car loan, but if you extend the term of the loan, that adds to the challenge, rather than solving it.”

By purchasing used vehicles, suggests Hamrick, consumers can own a high-quality vehicle at a much lower price, since new cars depreciate rapidly in the first or two years.

“Why not let another buyer take that hit in the first couple of years, then buy it cheaper at this point?” Hamrick said. “If you get a loan to finance the purchase, you will have a lower monthly payment and be able to pay it off faster with a shorter loan term.

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