The Federal Reserve Bank of New York (NY Fed) revealed that 7-million of us have a serious car loan problem. In its Quarterly Report on Household Debt and Credit released in February 2019, it also found that total household debt increased to $13.54 trillion in the United States. Auto debt makes up $1 trillion of this total.
Growing auto debt
Auto loans have followed the overall trend of increasing household debt in the U.S. Since 2011, auto loans have been growing, according to the NY Fed. It noted that there had been more newly originated loans, and they reached the highest level in 2018. Americans had a total of $584 billion in new auto loans and leases last year.
The Consumer Credit Panel (CCP) showed that most borrowers had credit scores above 760. They made up about a third of all auto loans. The number of subprime borrowers with lower scores fell. Nevertheless, the large increase in the number of total auto loans and leases means there are still many subprime borrowers.
More delinquent loans
The report from the NY Fed found an alarming number of Americans with serious delinquencies in auto loans. The 7-million borrowers who are 3 months or more behind on payments risk having their cars repossessed, and they’ll still have to pay back whatever’s left of their loans when the cars are sold at auction.
The number of outstanding and unpaid auto loans has been increasing since 2012. The number of people who were behind on their car payments was higher in 2018 than in 2010. Some experts believe the large number of loan delinquencies indicate the car market is headed for a slowdown or a major decline. Others think it may not become a serious issue.
The report showed that millennials, especially those under the age of 30 with low credit scores, were leading the delinquent auto loans in higher numbers than other generations. This may be because millennials have more student loans and are not able to keep up with all their payments. Millennials have $1-trillion in student loan debt, so it is not surprising that they would struggle to pay all of their bills.
Millennials also have fewer options. As many of them struggle to find consistent and well-paying work, they need reliable vehicles and have to use financing to afford them. When you compare current millennials to Generation X, they’re taking out more loans at a 21% higher rate.
What happens after missing 3 payments?
Although some lenders may try to repossess a vehicle after one late payment, most wait until two or three late payments. In some cases, your car may have a chip that a lender can disable remotely, so you can’t use it. A delinquent loan means you’ve missed a payment, but a defaulted loan means you haven’t paid anything for 90 to 120 days. Once your loan is in default, it’s more likely your car can be repossessed. Your lender can take the car and try to sell it. If the car is sold for less than the amount you still owe, then you may have to make additional payments. A voluntary or involuntary repossession will affect your credit score in a negative way.