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Late Auto Loan Repayments by Seven Million Americans: The State of the Auto Economy

By Mike Richards Updated: 01/31/2023 Posted: 02/26/2019

The Federal Bank of New York has reported that for the past 90 days, at least seven million Americans have failed to meet their car loan obligations. This is quite worrying considering the economy is said to be quite stable with unemployment at the lowest level in years at 3.9%. About 44% of American adults are benefiting from auto loans. Today, Americans owe approximately $1.1trillion in auto loans.

Automobiles are a cherished asset by most Americans. Without a car, it is difficult to get to work comfortably. Many Americans have two or three jobs. Having a car makes it easier to move from one job to the next without the delays that are often experienced when using public transport. Considering the value of a car to an average American, defaults in car loan repayments are very telling of the financial struggles faced by many Americans.

Signs and Reasons for the Struggles Faced by Financiers and Car Owners

Increased Duration of Car Loans

In 2017, the average duration of auto loans was 68 months. In April 2018, the average length of can loans was 69.2 months. This could be because of stagnated wages in the midst of an increasingly unaffordable lifestyle. The cost of housing, medication and food has pushed many car owners with auto loans to take a longer time to repay their loans.

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The Choice of Cars

SUVs and trucks are popular with most Americans. When given the choice, especially with financing, most Americans would pick a car they love, and not necessarily a car they can afford. Of the 10 best selling cars in the US in 2018, seven were trucks, crossovers and SUVs, which come with a high price tag. The cost of repayments and insurance of these cars have a significant impact on a middle-class American earning an average of $59,000 annually.

Record High Financing

Companies offering financing for automobiles have been competing heavily to tap into the hungry American population seeking auto financing. According to Moody’s, the average financing received by car buyers has been as high as $35,000. This is a record high figure that has pushed monthly repayments up to $500.

Further Reading

Increased Lending to Subprime Borrowers

Bloomberg recently reported that higher delinquency of auto loans is by subprime borrowers. 5.8% of the over 60 days delinquency in auto loans has been attributed to subprime borrowers. Economists are worried because this trend is worse than during the 2008/2009 financial crisis.

Many auto loan financiers have been a lax when it comes to the credit history of the borrowers. It is true that people with great credit get lower interest rates. However, the interest rates on subprime borrowers has been quite attractive to some financiers. Prime borrowers get an interest rate of between 4.5% and 5%. Sub-prime borrowers, on the other hand, get financing with an interest rate of up to 20%.  Between 2009 and 2015, the percentage of no-prime and subprime borrowers increased from 28% to 39%.

Americans are Showing an Increased Acceptance of Debt

The strong economy and low unemployment levels have played a significant role in the decision by Americans to take on more debt. This may have been done out of the assumption that a good economy automatically translates into personal financial growth. Unfortunately, many people who have taken car loans have realized their wages have not kept up with the thriving economy. This has increased car loan delinquency.

Compared to Other Loans, Auto Loans are the Most Affordable

When faced with a choice between getting a mortgage and a car loan, most people would be inclined to go for the car loan. This is because car loans are much cheaper than house loans, which usually costs hundreds of thousands while car loans cost $35,000 or less.

Americans Have Multiple Loans Running at the Same Time

According to the report released by the Federal Bank of New York, most of the defaulters have low credit and are younger than 30 years old. Most people in this age group are grappling with the challenge of repaying their students loans. Either this age group has not benefitted from the strong workforce, or the wages are still too low.

Ease in Getting Car Loans

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After the last economic crisis, banks came up with strict regulations to ensure only those who can afford to own a home get a mortgage. This was done in a bid to ensure America does not face another crisis in the real estate sector. Unfortunately, the same has not been done when it comes to American auto lending boom. It has become much easier to get a car loan since there are several independent financiers, outside the mainstream lending market. Today, one can get financing from a car dealership.  Traditional banks and Credit Unions have lower default rates when compared to loans given at car dealerships.

Although the current trend is worrying, chances of the auto loan defaults affecting the economy to the magnitude mortgages did in 2008/2009 are slim. To avoid being caught in the debt quagmire, it is critical for you to compare rates of car loans from various companies and financial institutions. Before committing yourself to a car dealership offering you a car loan, it is vital for you to find out if you are getting the best deal.

It is also essential that you ask yourself if you can afford to make repayments for the car loan. If you cannot afford a new car, you may opt for a used car. Many Americans have no qualms about buying used cars as long as they can afford it. It is best for you to be open about the type of car you buy. The costlier the car, the larger your monthly repayments. The difference between you meeting your car loan obligation and being part of the delinquent car loan statistics starts with choosing a car you can afford.