Rising vehicle loan delinquencies

The delinquency rate on vehicle loans has been steadily rising since 2011.
The delinquency rate on vehicle loans has been steadily rising since 2011.PHOTO: AGENCE FRANCE-PRESSE

More than six million Americans fail to make the monthly loan payments and are in danger of losing their vehicles

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 on Tuesday from the New York Federal Reserve.

There are 6.3 million Americans who are 90 days late - or more - on their vehicle loan payments, an increase of about 400,000 from a year ago.

When someone gets so far behind on his payments, he typically ends up losing his vehicle.

The delinquency rate on vehicles 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 per cent, 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 vehicle loan delinquencies is a reminder that millions are still struggling to make ends meet.

Many people who cannot pay their car loans have bad credit scores of under 620 on an 800-point scale. They do not have many options to get money to buy a new or used car and often end up getting a sub-prime vehicle loan that comes with an interest rate of 15 to 20 per cent.

The Federal Reserve noticed a big difference between people who get their vehicle 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 vehicle finance companies, 9.7 per cent of their sub-prime 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 per cent of their sub-prime 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 Mr Wilbert van der Klaauw, senior vice-president at the New York Federal Reserve.

Some have started to compare what is happening in the vehicle loan market to the home mortgage crisis that helped trigger the Great Recession and financial crisis of 2008 to 2009.

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.

Stringent regulations put in place after the crisis have made it harder to get a home mortgage, but most of the rules do not apply to vehicle finance companies.

It is telling that delinquency rates for home mortgages and credit cards have been steadily falling since 2010, while vehicle loans and student loan rates have been rising.

The problems with vehicle loans are unlikely to cause another financial crash, as the market is much smaller than the mortgage market. The average car loan is about US$30,000 (S$40,367), according to credit company Experian, compared with over US$220,000 for the average home loan, the National Association of Realtors said.

Still, economists and Wall Street bankers have been keeping watch on how many people are having trouble paying their vehicle loans because they believe it is 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 sub-prime 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 Federal Reserve wrote in its blog post on Tuesday.


A version of this article appeared in the print edition of The Straits Times on November 25, 2017, with the headline 'Rising vehicle loan delinquencies'. Print Edition | Subscribe