NEW YORK—Are concerns over auto loan delinquencies rising?
A new report from the New York Federal Reserve indicates that may be the case. The New York Fed reports that a rising number of Americans are unable to make the monthly payments on their car or truck loans and are in danger of having their vehicles repossessed.
The Fed data also shows the greatest concerns lie with loans made by auto finance companies to subprime borrowers.
CUToday.info has extensively reported that auto loan terms have been extending to unhealthy levels as consumers attempt to keep monthly payments affordable as car prices rise—now above $33,000 for the average new car sticker. Borrowers, too, have reached record levels of negative equity.
Red Flag
There are 6.3 million Americans who are 90 days late — or more — on their auto loan payments, an increase of about 400,000 from a year ago, the Washington Post reported.
“The delinquency rate on autos has been steadily rising since 2011, a red flag at a time when the unemployment rate has been falling. The unemployment rate is now 4.1%, the lowest level since 2000. As more and more Americans get jobs and income coming in, it should be easier for them to pay their bills. But the rise in auto loan delinquencies is a reminder that millions are still struggling to make ends meet,” the Post said.
Many of the people who can't pay their car loans have bad credit scores of under 620 on an 800-point scale. They don't have many options to get money to buy a new or used car and often end up getting a subprime auto loan that comes with an interest rate of 15% to 20%, the Post stated.
Earlier this year Wells Fargo announced it was backing off subprime lending. Also, automotive industry analysts have stated that many of the major banks, which had been increasing their focus on subprime following the financial crisis, are backing away from this segment as well.
Bank And CU Delinquencies Lower
“The Fed noticed a big difference between how people who get their auto loan from a bank or credit union vs. those who get a loan from an ‘auto finance lender,’ such as a ‘Buy Here, Pay Here’ firm. Among auto finance companies, 9.7% of their subprime loans are late by 90 days or more, not far from the delinquency rate during the worst days of the Great Recession. In contrast, banks and credit unions only have 4% of their subprime loans in delinquency,” the Post stated in its analysis.
“Delinquency rates among auto finance lenders are considerably higher and rising, especially for subprime borrowers, in part reflecting differences in underwriting standards,” Wilbert van der Klaauw, senior vice president at the New York Fed, told the Post.
“Some have started to compare what's happening in the auto loan market to the home mortgage crisis that helped trigger the Great Recession and financial crisis of 2008-09. Many of the same issues are back: Lenders appear to have lowered their standards to give people car loans who probably should not qualify or should not be getting such a large loan. A man in Alabama was able to use his shotgun to cover most of the down payment,” the Post noted.