Las Vegas Review-Journal

Auto delinquenc­ies raise red flag

Rate increasing despite drop in unemployme­nt

- By Heather Long The Washington Post

A rising number of Americans cannot make the monthly payments on their car or truck loans and are in danger of having their vehicles repossesse­d, according to data released Tuesday from the New York Federal Reserve.

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. Those who get so far behind on their payments typically end up losing their vehicle.

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 percent, the lowest 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.

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 percent.

The Fed noticed a big difference between how people who get their auto loan from a bank or credit union and those who get a loan from an “auto finance lender,” such as a “Buy Here, Pay Here” firm. Among auto finance companies, 9.7 percent 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 percent of their subprime loans in delinquenc­y.

“Delinquenc­y rates among auto finance lenders are considerab­ly higher and rising, especially for subprime borrowers, in part reflecting difference­s in underwriti­ng standards.” said Wilbert van der Klaauw, senior vice president at the New York Fed.

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 car loans to people 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 problems with car loans are unlikely to cause another financial crash. The auto loan market is much smaller than the mortgage market. The average car loan is about $30,000, according to credit company Experian. The average home loan is over $220,000, the National Associatio­n of Realtors says. Still, economists and Wall Street bankers have been keeping watch on how many people are having trouble paying their car loans because they believe it’s an early warning sign of economic distress.

“Although the impact on the larger financial sector may be muted, there are over 23 million consumers who hold subprime auto loans. These consumers may find their credit reports further damaged after a default or encounter further financial difficulti­es after experienci­ng a car repossessi­on,” the Fed wrote in its blog post Tuesday.

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