Report: 7 Million Americans Are More Than 3 Months Behind On Their Car Payments, Worst Delinquency Rate Since 2010

It's a record figure, and one that sends up a red flag for the industry

The numbers are worse now than in 2008.

Report: More Than 7 Million Americans Are More than 3 Months Behind On Their Car Payments
[Photo source: Flickr]

Right now, you may be struggling to keep up on your car payments. Let’s face facts: Cars, by and large, are just getting more and more expensive with each passing year. If you are struggling, you’re not alone, as the Federal Reserve Bank of New York announced Tuesday. That announcement highlighted a record 7 million Americans that are 90 days past due on their auto loan payments. Economists warn that is a serious red flag, according to a Washington Post report.

Here’s something to bring that figure to life for you. Today, there are a million more “troubled buyers” than there were in 2010, at the height of the last financial crisis. Back then, the unemployment rate was 10 percent. By extension, the auto loan delinquency rate peaked at 5.8 million. As of January 2019, the unemployment rate rests at 4.0 percent. Job openings are at an all-time high. So what’s going on?

Heavy burden to younger car buyers

According to the Federal Reserve, the rate of delinquency is higher among younger buyers than older ones. Buyers under age 30 who are behind on their bills often carry both auto loans as well as student loans, and are struggling to repay both at the same time. Even though delinquency rates among young buyers is higher, other age groups are at a statistically significant risk as well. Car buyers in the 50-69 age bracket, who usually have stable and secure income and less debt, are the least likely to default on their loans.

When car sales peaked at a record 17.5 million in 2016, more people were taking out loans than ever before. As a result, the share of buyers more than 90 days late stands at 5.3 percent, according to The Washington Post. Now, it’s 4.5 percent, although the actual amount of people seriously delinquent on their loans has risen sharply.

The average auto loan amount is currently around $35,000.

Tips to avoid repossession

Against the mortgage crisis that triggered the 2008 financial meltdown, auto loans are still relatively safe. The total amount people are borrowing — $35,000 — is far less than what people borrowed to buy houses. The Post points out that the total auto loan market is over $1 trillion. That’s about 15 percent of the home mortgage market, which totals $9 trillion.

Still, according to Michael Taiano of Fitch Ratings, “It’s a lot easier to repossess a vehicle than to foreclose on a home.” To that end, the Post piece included some useful information to avoid being severely impacted by auto loan debt.

1) Do not finance through the dealership

Christopher Peterson, a law professor at the University of Utah, advised against financing directly through the dealership. By and large, credit unions and local banks offer more appealing interest rates to their customers. A low-cost loan means buyers have an easier time keeping up with payments and are less likely to default. In fact, those with loans through credit unions have a default rate of less than 1 percent. Major auto finance companies, on the other hand, have a 6.5 percent default rate.

So-called “sub-prime” loans offered by buy-here, pay-here dealerships also pose a huge risk to buyers. In the end, it’s not uncommon for those buyers with low credit scores — under 620 on an 800-point scale — to be charged up to 20 percent on an auto loan. According to Faye Park, president of the U.S. Public Interest Research Group, “Predatory lending practices and a lack of real transportation options leave many households trapped in debt with few ways out.”

2) Make your car payment your first priority

Even if you are struggling to keep up with your car payments, some argue you should strive to pay it first. “Your car loan is your No. 1 priority in terms of payment,” Taiano said. “If you don’t have a car, you can’t get back and forth to work in a lot of areas of the country. A car is usually a higher-priority payment than a home mortgage or rent.”

Those who have fallen behind on their payments and are at risk of repossession could lose their jobs if they’re unable to commute. If that happens, the buyer is likely to default on their other debts as well, making the problem even worse.