Warning Signs Continue for Subprime Auto Loan Crisis

Back in April of this year, I wrote about the rising number of delinquency and default rates in the subprime auto loan market. Since then, the warning signs are still flashing.

According to data recently released by the New York Federal Reserve, 6.3 million Americans are late on their auto loan payments by 90 days or more. A recent Washington Post article pointed out that number is up about 400,000 from one year ago. Even though the unemployment rate is theoretically falling, data has shown that delinquency rates have been ticking up since earlier this decade.

So, What Gives?

There is a large difference between those who get their auto loans from a bank or credit union and those who get their loans from a type of “Buy Here, Pay Here” lender. Many consumers don’t have credit scores that allow them to borrow money at lower interest rates. Instead, they finance subprime loans through auto finance lenders. Those subprime loans come with north of 15 to 20 percent interest rates. Furthermore, default rates for those auto lenders is almost at the Great Recession height of 9.7 percent—compared to only 4 percent of banks and credit unions.

The effect of rising delinquency and default rates in the subprime market is, as expected, debated by experts. Some state the same issues that plagued the mortgage crisis are present in the auto loan market. For instance, lenders have lowered their standards to allow those who should not qualify to get a loan or at least that large of a loan. Others argue despite the rising default/delinquency rates, the auto loan market is a lot smaller than the mortgage market. In other words, the auto loan default/delinquency rates are not likely to cause another financial crash. Still, 23 million Americans have subprime loans. The signs of struggle to pay those loans on time signal some form of economic trouble. Further, many consumers credit reports are damaged after defaults and repossessions.

 

The takeaway for consumers should be this: If you are struggling with paying your car loan, there is help. I see people everyday who are over their heads because of crushing interest rates on the vehicles that they have paid for 3 times over. If this sounds like you, please call one of our offices nearest you to set up a free consultation with one of our experienced attorneys.