Auto loan delinquencies are on the rise. What to do if you have problems with payments
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For a growing proportion of car owners, monthly car loan payments are becoming a problem.
While borrowers who are over 60 days past due on their payments make up a tiny fraction of all outstanding auto loans — 1.84% — their ranks are growing, according to data recent report from Cox Automotive. In December, this share was 26.7% higher than a year earlier, and it mainly falls on borrowers with a low credit rating.
“The danger of trying to pay off an auto loan isn’t just that your car could be seized, it’s a long-term impact on every other area of your finances,” said certified financial planner Angela Dorsey, founder of Dorsey Wealth Management in Torrance. , California.
High prices, interest rates led to large payments
A combination of market factors led to an increase in monthly loan payments. And as personal savings decreased and persistent inflation has reduced household budgets, making payments can become even more of a challenge.
According to JD Power and LMC Automotive, the median price of a new car hit a record high of $47,362 in December.
Edmunds said monthly payments in the fourth quarter averaged $717, up from $659 a year earlier. The proportion of shoppers who have assumed monthly payments of $1,000 or more reached 15.7%, up from 10.5% a year earlier. In the fourth quarter of 2020, only 6% of borrowers had such large monthly auto payments.
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Rising interest rates also affected affordability. According to Edmunds, the average rate on a new car loan was 6.5% at the end of 2022. For used cars, the average was 10%. A year earlier, these rates were 4.1% and 7.4%, respectively.
Loan arrears can damage your credit history
While auto loan delinquencies are rising, default rates are not, Cox said. Entering a default – when your lender decides you’re not going to pay, usually sometime after 90 days of no payments – can result in your car being impounded.
However, even a single payment delay takes a toll on your financial life, and it can be long-term.
“If you are 30 days late, your credit score will be affected,” said Brian Moody, executive editor of Kelley Blue Book.
This is when lenders usually report late payments to Equifax credit reporting firms. Experian And TransUnion.
In addition, you should be aware that since your payment history is the most influential factor in your credit score – it usually accounts for 35% – you can see drop 100 points due to a payment delay of 30 days, according to NerdWallet. The longer a loan goes unpaid, the greater the impact on your bill, and this delinquency can remain on your credit report for up to seven years.
Generally, consumers know that the lower your score, the more likely you are to pay higher interest rates on new loans or loans you receive. Also, a bad score or bad credit history can cause you to pay higher auto or homeowner insurance premiums, and this will affect your ability to rent an apartment or even get a job. Employers cannot see your grade, but they can check your report.
What to do if you’re having trouble paying off your car loan
For car owners who are almost certain they are heading for delinquency, it is important to try and prevent the problem from snowballing.
“If you feel like it’s coming, stay tuned,” Moody said. “Do not do anything. It won’t get better on its own.”
Experts say that if you’re struggling to keep up because you’re on a bad budget, it’s at least potentially fixable. In this case, take a close look at how you spend money.
“Look at your overall spending over the past few months,” said Joe Pendergast, vice president of consumer finance for the Navy Federal Credit Union. “You would be amazed at how much the average person spends each month without realizing it.”
However, if the payments are simply out of control, the first thing you should do is get your creditor up to date.
“If a consumer is having difficulty paying for a car or anticipates problems in the future, they should contact their financial institution as soon as possible,” Pendergast said.
The sooner your bank or credit union is informed, the easier it will be to find possible solutions.
Vice President for Consumer Lending, Navy Federal Credit Union
“The sooner your bank or credit union is informed, the easier it will be to find possible solutions,” he said.
While options vary from lender to lender, you can get a deferral—that is, several months without payment—or a new loan that lowers payments by extending the term. In any case, keep in mind that this will usually lead to an increase in the interest rate, noted Moody from Kelly Blue Book.
However, the delay will at least give you time to figure out how best to handle your situation, he said.
For example, you might sell your car with the intention of buying a cheaper one—or perhaps even do without it if you have other transportation options. Just be aware that depending on how much you owe on the loan, the price you get for your car may not fully cover your balance, which means you still owe money to the lender.
There may be a similar gap in value if you choose to trade it in. Although the exchange amounts were relatively high due to the cost of used cars is going up, this is changing. The latest inflation data showed an 8.8% year-on-year drop in used car prices.
And if the amount the dealer is willing to give you is less than what you owe on the loan, you will need to either pay off the balance or include it in the new loan. This so-called negative equity averaged $5,341 in the last quarter of 2022, according to Edmunds.
“None of these [options] perfect,” Moody said. “They all fall into the “better than nothing” category.