With more families falling behind on their car payments, most banks and lenders have started tightened their lending standards. This has resulted in auto loans becoming more difficult to get for families with lower or marginal credit scores.
The number of auto loans that are now delinquent has increased to almost 4% during the first quarter of 2017. What this means is that 4% of borrowers, or over 6 million households, have a payment that is at least 90 days late; many of those are even further behind. While that percentage may not seem that high to many people, it is in fact the highest it has been in about four years. So even as the job market is at full employment, and the jobless rate is a little over four percent, American households are struggling to pay their car loans.
In response to this problem a number of lenders are starting to cut back on who can get a loan. They are raising the standards for applicants. As a result of these more stringent requirements, the median credit score required to get an automobile loan the first quarter of 2017 was 706. This in an increase of 11 points since 2016. So if you do not have good credit (which is generally defined by companies such as Experian as a score of 700), then it will be more difficult to borrow money to buy a new car.
If your credit score is under 700 (or close to it), then there are steps you can take to improve it. If you are thinking of buying a new car or truck sometime in 2017, then you want to start this process as soon as possible as it does take time to increase a score, and both local and national lenders are watching closely. Find what you can do to improve your credit scores.
What is very unusual here is the fact that the job market really is booming but almost 4% of households are late on their payments; and being 90+ days late is significant. To put this into perspective, when the unemployment rate was over 9% in 2010 the auto loan delinquency rate was “only” 1.2 percent higher at 5.3%. So when twice as many Americans were out of work they were still doing a great job in paying their automobile loans on time.
What is causing more people to fall behind, even with a strong economy? While the reason vary greatly, one of the leading ones is the fact that Americans are just “stretching” to buy cars they can barely afford. So they are taking out 6, 7, or 8 year long car loans. Then if something goes wrong or changes in their personal or financial lives, no matter how small the change is, they start to miss payments. Now lenders are taking notice and tightening lending standards.
Another reason that banks are cutting back on who can get a car loan is that too many borrowers were considered to be sub-prime. This means their credit score was below 640. The number of sub-prime borrowers in 2015 and 2016 was actually higher than before the financial crisis, so lenders have put the brakes on that as 2017 started.
So while a record 107 million Americans now have car loans, the “party” may soon be over. Households should start to plan on it becoming a little more difficult to borrow money to buy an auto. This trend will be bound to continue through 2017 and may carry over until 2018 as well.