On Tuesday, the Federal Reserve released new data about household debt, and it revealed some interesting findings regarding Americans and their auto loans. Specifically, it showed that an increasing number of Americans are unable to keep up with their monthly car payments.
Currently, 6.3 million Americans are at least 90 days late on their car payments, a figure that has increased by nearly half a million in the past year. This led the researchers at the Fed to conclude that many consumers may see their credit reports damaged and experience further hardships as a result of auto repossession.
Consumer borrowers owe $1.2 trillion in auto loans debt, and there are 23 million Americans who currently hold subprime auto loans. This means roughly 20 percent of borrowers who take out a car loan have credit scores below 620.
The data from the Fed also noted a statistical difference between borrowers who choose to go through a bank or credit union and borrowers who go through an auto finance lender. 9.7 percent of subprime loans given through auto finance lenders were at least 90 days delinquent last quarter. Meanwhile, banks had 4 percent of their subprime loans in delinquency last quarter.
This led Wilbert van der Klaauw, senior vice president at the New York Fed, to speculate that these figures may be at least partially due at to discrepancies in underwriting standards. Subprime borrowers often have fewer options available and can qualify for car loan rates as a high as 15 to 20 percent.
The number of borrowers missing payments on their auto loans has continued to increase since 2011. This is surprising given that unemployment is at an all-time low of 4.1 percent.
The fact that auto delinquency continues to rise as unemployment continues to drop indicates that many lenders have considerably lowered their lending standards. Because auto loans are not regulated as strictly as mortgages, it easier for lenders to give car loans to individuals who probably shouldn’t qualify. Furthermore, it was noticed earlier that auto loan borrowers were taking on more risk with longer term loans.
Some experts compared these events to the factors that sparked the 2008 financial crisis. But truth be told, while certain characteristics may draw parallels to 2008, a rise in delinquent car loans is unlikely to cause another financial crisis. The average car loan is $30,000; mortgages average $220,000.
But it is important to pay attention to these events because they could forewarn signs of economic distress. And it shows that many Americans are still having trouble meeting their financial obligations.