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, according to data released this week by the New York Federal Reserve.
There are 6.3 million Americans who are 90 days late — or more — on their auto loan payments, up about 400,000 from a year ago. When someone gets so far behind on their payments, they typically end up losing their vehicle.
The delinquency rate on auto loans has been steadily rising since 2011, a red flag at a time when the unemployment rate has been falling. The unemployment rate is 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.
Many of the people who can't pay their car loans have bad credit scores — lower than 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 Fed noticed a big difference between people who get their auto loan from a bank or credit union and those who get it from an "auto finance lender," such as a "Buy Here, Pay Here" firms. 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 have only 4% 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 people car loans who probably should not qualify or should not be getting such a large loan. For example, a man in Alabama was able to use his shotgun to cover most of the down payment when he took out a car loan.
Stringent regulations put in place after the financial crisis have made it harder to get a home mortgage, but most of the rules don't apply to auto finance companies. It's telling that delinquency rates for home mortgages and credit cards have been steadily falling since 2010, while delinquency rates for auto loans and student loans have been rising.
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 rating company Experian, compared with more than $220,000 for the average home loan, according to the National Assn. of Realtors. 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 said Tuesday in a blog post.