The US economy is stable and the unemployment rate is extremely low. But a growing number of Americans are falling behind on their car payments.
About 9.3% of auto loans extended to people with low credit scores were 30 days or more behind on payments at the end of last year, the highest share since 2010, according to an analysis by Moody’s Analytics.
The past few years have been particularly good for consumers, who held on to extra cash during the pandemic, but those gains are being eroded by sky-high inflation. Car prices, in particular, jumped due to a shortage of vehicles. Many borrowers took out large loans to buy them, leaving little breathing room to keep up with payments if they hit a rough patch.
“Perhaps the families that were on the financial scene at the beginning were put up to the point that it is difficult to keep up with the car loan and everything else, and people are going to make some very difficult decisions, ” said Pamela Foohey, professor. at the Cardozo School of Law studying consumer law.
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Stress in the auto loan market is concentrated among borrowers with credit scores below 660 and is particularly high among people with rock-bottom credit. But the stress could dissipate if the US goes into recession, as many economists expect. If the number of job losses increases, many more consumers may not be able to keep up with the record amounts of debt they have taken out in recent years.
Chris Woodward, of Cedar Falls, Iowa, was laid off from his software job in August, his second job loss in eight months. Soon after, he fell behind on the loan on his 2011 Ford Flex. While looking for a new job, he also fell behind on rent and ran up his credit card bill, he said.
He set up a GoFundMe fundraiser as a last resort. So far his family of four has received about $10,000, which has enabled him to make enough payments to hold off car repossession or foreclosure, although he is still behind in dealing with the bills to be paid every month.
“It’s a strange thing to go from having a good salary and not stressing, to, ‘How am I going to buy diapers?'” Mr Woodward said.
Mr Woodward bought his car in early 2022, around when car prices were at their peak. Used car prices jumped 47% in 2021, then fell 15% in 2022, according to the Manheim Used Vehicle Value Index, which tracks US wholesale auction values.
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Borrowers who took out big loans during the boom owe far more than their vehicles are worth. Those buyers are sticking with bigger losses for lenders when they fall behind.
Ally Financial Inc., which operates a large auto loan business, said in January that the loans it extended between mid-2021 and mid-2022 have more early losses than its other loans. In the fourth quarter, the percentage of auto loans that were more than 60 days past due rose above pre-pandemic levels for the first time.
Car prices peaked when borrowers’ financial profiles looked particularly strong. Consumers had received government stimulus and spending cuts early in the pandemic, boosting their savings. Then stock prices rose, and a booming economy helped people raise the land.
Consumer credit scores have risen, which may make underwriting less accurate, according to Ryan Nash, an analyst at Goldman Sachs who covers banks. Lenders were able to make large loans to borrowers, sometimes on the assumption that their finances were permanently strengthened.
“2021 was a bit of the Wild West in the car market,” said Mr Nash.
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Nearly a fifth of banks said they lowered credit standards for auto loan applicants in the first half of 2021, according to a Federal Reserve survey of senior loan officers, and more than a 10th did in the second half. Many said they lowered their minimum credit score requirements that year.
Consumer lawyers said that when cars were in short supply during that time, some dealers were able to sell vehicles in worse condition, increasing the risk that they would break down or require major repairs. The main reason borrowers stop paying is because the car stops working.
“We get a tremendous amount of calls from people who bought cars that should never have been put on the road,” said Daniel Blinn, a Connecticut-based attorney who has sued auto dealers and lenders.
The number of people who lost their cars to repossession rose 11% in 2022 but remains below pre-pandemic levels, according to a Cox Automotive estimate based on wholesale auctions and default rates.
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Vanessa Davis, a 24-year-old nurse in Fontana, California, said her 2022 Chevy Trax was repossessed after she missed payments due to a family emergency. Ms. Davis had to pay $600 in repossession fees to get her car back, she said, in addition to a $650 payment for January.
“All we have left is to survive,” said Ms. Davis. “At this point we are trying everything we can and the best we can to keep every penny.”