Auto loan defaults reach record high as economists question stability of the economy
A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported this month, even more than during the wake of the financial crisis era. Today, unemployment is 4 percent, and many more Americans have jobs, yet a significant number of people cannot pay their car loan.
Economists warn this is a red flag.
Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.
“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,” economists at the New York Fed wrote in a blog post.
A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails.
When car loan delinquencies rise, it is a sign of significant duress among low-income and working-class Americans.
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Steve Eisman, the hedge fund manager made famous in the book and film The Big Short by cashing in on badly designed mortgages he spotted before the recession, told The Financial Times in 2017 that auto loans generally held up well better than mortgages in those years because consumers “tended to default on their house first, credit card second and car third.”
“Your car loan is your No. 1 priority in terms of payment,” said Michael Taiano, a senior director at Fitch Ratings. “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.”
People who are three months or more behind on their car payments often lose their vehicle, making it even more difficult to get to work, the doctor’s office or other critical places.
The New York Fed said there were over a million more “troubled borrowers” at the end of 2018 than there were in 2010, when unemployment hit 10 percent and the auto loan delinquency rate peaked.
Fewer than 1 percent of auto loans issued by credit unions are 90 days or more late compared with 6.5 percent of loans issued by auto finance companies.
“The No. 1 piece of advice I have is to not get your financing from a car dealership,” said Christopher Peterson, law professor at the University of Utah and former special adviser to the Consumer Financial Protection Bureau. “Shop separately for the vehicle and the financing. Go to a credit union or community bank to get a low-cost loan.”
Rates can vary substantially depending on a borrower’s credit score and where they obtain a loan. A “prime” borrower with a credit score in the range of 661 to 780 can get an auto loan rate of about 4.5 to 6 percent, according to NerdWallet. In contrast, a subprime borrower is typically looking at rates between 14.5 and 20 percent.
