Auto delin­quen­cies raise red flag

Rate in­creas­ing de­spite drop in un­em­ploy­ment

Las Vegas Review-Journal - - BUSINESS - 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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