A record of 7 million Americans is 90 days or more behind their car loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than in the wake of the economic crisis.
Economists warn that this is a red flag. Despite the strong economy and low unemployment, many Americans struggle to pay their bills.
"The significant and growing number of worried borrowers suggests that not all Americans have benefited from the strong labor market," New York Fed economists wrote in a blog post.
A car loan is usually the first payment people make because a vehicle is critical to getting to work and someone can live in a car if everything else fails. When car loan disturbances rise, it is usually a sign of significant coercion among low-income and working-class Americans.
"Your car loan is your priority in terms of payment," said Michael Taiano, senior manager at Fitch Ratings. "If you don't have a car, you can't come back and forth to work in many areas of the country. A car is usually a higher priority than a mortgage or rental."
People who are three months or more behind car payments, often loses the vehicle, making it even more difficult to get to work, doctor's office or other critical places.
New York Fed said there were over a million more "troubled borrowers" by the end of 2018 than it was in 2010, when unemployment hit 10 percent and car loan default rates peaked. Today, unemployment is 4 percent and job openings are quite high, but a significant number of people cannot pay the car loan.
Most of those behind the bill have low credit points and are under age 30, suggesting that young people have a hard time paying for their cars and their student loans at the same time.
Auto loans have increased in recent years when car sales skyrocketed and hit record highs in 2016 on 17.5 million vehicles sold in the United States. Overall, many borrowers have strong credit points and repay the loans on time, but the standards have been high among subprime borrowers with credit points below 620 on an 800-point scale.
The proportion of borrowers who were three months behind their payments peaked at 5.3 per cent at the end of 2010. The proportion is somewhat lower now – 4.5 per cent – because the total number of borrowers has risen so much in recent years. Nevertheless, economists are concerned that the number of people who have influence is far greater now, and the frequency has climbed steadily since 2016, even as more people found work.
Experts warn Americans to be careful where they get their auto loan. Traditional banks and credit unions have much lower standard prices than "auto finance" companies like "buy here, pay here" places on some car lots.
Less than 1 percent of auto loans issued by credit unions are 90 days or more late, compared to 6.5 percent of loans issued by auto finance companies.
"No. Advice I have is not getting your financing from a car dealership," said Christopher Peterson, a professor of law at the University of Utah and former special adviser to the Consumer Financial Protection Bureau. "Shop separately for the vehicle and financing. Go to a credit union or community bank to get a low-cost loan. "
Prices can vary significantly depending on a borrower's credit score and where they get a loan. A" prime "borrower with a credit score In the range of 661 to 780, a loan rate of around 4.5 to 6 percent can be obtained, according to NerdWallet. In contrast, a subprime borrower usually looks at rates between 14.5 and 20 percent.
After the financial crisis, the government has imposed huge mortgage restrictions To make it more difficult to withdraw mortgages unless someone can afford to make monthly payments, but experts warn that there are far fewer restrictions on auto loans, which means that a consumer must be savvy about what they do when they takes out a loan.
"Predatory lending practices and lack of genuine transport options allow many households to be caught in debt with few ways out," said Faye Park, US Public Interest Re search group, which speaks for consumer protection.
Repossessing a car is also a fast process thanks to technology and the laws of many states. Some cars are installed with devices that prevent the car from turning on if someone misses a payment, and it has become easier to geo-locate a car to tow it away.
"It's much easier to take a vehicle back than to foreclose on a home" Taiano said.
He noted that non-prime and subprime auto loans increased from 28 percent of the market in 2009 to 39 percent in 2015, a reminder of how aggressive lenders went for borrowers who were in margin to pay. Several lenders give people six or seven years to pay back against four for five years earlier, according to Experian, another tactic to try to get loans to look affordable, which might not otherwise be.
While the standard on auto loans is a red flag, it is unlikely that they will take down the entire financial system as a home loan in the follow-up to the financial crisis 2008-2009. The total car loan market is just over $ 1 trillion, far less than the $ 9 trillion mortgage market.
How much money people borrow to buy a car is also much smaller – usually under $ 35,000 – against a mortgage where people often borrow hundreds of thousands of dollars.
Editor's note: Are you unable to pay your car loan? Or are you struggling with? The Washington Post would love to hear from you. Email: email@example.com
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