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Despite the growing economy in the United States, an increasing number of subprime auto loan borrowers are defaulting on their loans. The information collected by Fitch Ratings reveals the delinquency level is now at 5.8 percent, which is the highest rate of delinquency in more than 20 years, Bloomberg reported.
It’s an even riskier time now for lenders to take chances on subprime loans than it was during the Great Recession from 2007 to 2009. In the middle of the recession in 2008, the default rate was approximately 5 percent, which is lower than it is today.
As a result of this uncertainty, the number of subprime auto loans extended from January 2017 to January 2018 has dropped by nearly 10 percent.
The riskiest of the subprime auto loan borrowers might find more luck in going with smaller lenders that are willing to accept the risk to stay in the lending game. However, earlier this year, several smaller subprime lenders shut down – some of them because of loan losses.
What Borrowers Can Do When They’re in Trouble
When borrowers find themselves falling behind on their payments, they should address the situation right away instead of waiting until it hits rock bottom. If they ignore the situation and allow the situation to snowball, they could be in danger of having their vehicle repossessed.
Without a vehicle, people who are having financial difficulties might not have a way to get to work, which will only make a bad situation worse in the money department.
Borrowers should call their auto lender immediately when they anticipate a problem. By being straightforward about the issue, the lender might be more willing to work with them. It shows a lot more responsibility than someone who dodges their collection calls.
Borrowers can ask their lender if they have a deferment program to postpone payments. The borrower will still be on the hook for all the interest that accrues, but it may create enough time to ride out a temporary financial setback.
Another thing a borrower can try is asking for a new due date for the loan, which most companies will honor. With a due date set for two or even three weeks later, it could give a borrower enough time to scrape together the money for their payment.
One more option, although potentially less desirable than the other two, is refinancing the car for a longer term, which would lower the car payment but increase the cost over time. This is inherently risky because you’d also likely get a new interest rate. If you’re a subprime auto loan holder, then your chances of getting a good interest rate deal are slimmer than most. With a high interest rate, you are more likely to spend more over repayment, making the car more expensive. Despite that, it’s still a way to reduce your monthly in the short-term.
Author: Mike Brown
In his role at LendEDU, Mike uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.