Fed flags tardy auto-loan payments

A rising number of Americans are unable to make the monthly payments on their car or truck loans and are in danger of having the vehicles repossessed, according to data released Tuesday from the New York Federal Reserve.

There are 6.3 million Americans who are 90 days late -- or more -- on their auto loan payments, an increase of about 400,000 from a year ago. When someone gets so far behind on their payments, they typically end up losing the vehicle.

The delinquency rate on autos 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 percent, the lowest level since 2000. As more and more Americans get jobs earn income, it should be easier for them to pay their bills. But the rise in auto loan delinquencies is a reminder that millions are still struggling to make ends meet.

Many of the people who can't pay their car loans have bad credit scores of under 620 on an 800-point scale. They don't have many options to get money to buy a new or used car and often end up getting a subprime auto loan that comes with an interest rate of 15 percent to 20 percent.

The Fed noticed a big difference between how people who get auto loans from a bank or credit union versus those who get loans from an "auto finance lender," such as a "Buy Here, Pay Here" firm. Among auto finance companies, 9.7 percent of their subprime loans are late by 90 days or more, not far from the delinquency rate during the worst days of the last recession. In contrast, banks and credit unions have only 4 percent of their subprime 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 Wilbert van der Klaauw, senior vice president at the New York Fed.

Some have started to compare what's happening in the auto loan market to the home mortgage crisis that helped trigger the recession and financial crisis of 2008-09. Many of the same issues are back: Lenders appear to have lowered their standards to give people car loans 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 don't apply to auto finance companies. It's telling that delinquency rates for home mortgages and credit cards have been steadily falling since 2010, while auto loans and student loan rates have been rising.

The problems with car loans are unlikely to cause another financial crash. The auto loan market is much smaller than the mortgage market. The average car loan is about $30,000, according to credit company Experian, compared with over $220,000 for the average home loan, the National Association of Realtors says. Still, economists and Wall Street bankers have been keeping watch on how many people are having trouble paying their car loans because they believe it's 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 subprime 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 New York Fed said in its blog post Tuesday.

Business on 11/15/2017

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