The number of borrowers that are falling behind on their car loans continues to increase. The percentage of subprime loans that are delinquent now stands at almost nine percent according to Fitch, and this number is rapidly approaching the rates that were experienced in the depths of the 2009 recession. The number of upside down car loans also continue to approach record levels.
Many of the people that are behind are low income households. They took on so called subprime car loans as maybe their credit scores were not good enough for a “prime” loan. Or they borrower too much money and now do not have any equity. Now it turns out that many as six million of these borrowers may lose their automobile to their lender at some point during 2017.
If it turns out that these six million families lose their car, it will be a record for our country. But it is not a good record to have though as it is bound to cause even more hardships for those millions of families. If they have their car repossessed then it may impact their ability to get to their job, pay their bills, or get the food or medical care they need. That is why they should seek help with an upside down car loan.
Why are people struggling?
An analysis of the data from the New York Federal Reserve (which closely follows this industry) shows that most of the delinquencies are in the portfolios of “non-traditional” lenders. So this may be when a borrower turns to a used car lot in order to both borrow money as well as purchase their auto. Other families are turning to lenders such as internet only companies, loan sharks, and other companies.
On the other hand, the nation’s major banks, such as Chase or BOA, are not having the same delinquency issues in their portfolios. They are not being as aggressive in “pushing” auto loans to families with poor credit scores, and they also help modify car loans as well. So this means that this problem may not spread to the larger economy.
This is one of the reasons in which we recommend always staying away from any type of non-traditional lender, and people show always have hesitation is using payday companies, Peer to Peer lenders, or other companies. Also, never take out a long term loan which increases the risk of the car depreciating faster than it is paid off, as this is what is causing people to be upside down.
We always recommend using the services of a local or national bank (or even credit union) for any type of borrowing. And if you do not qualify for a loan from those sources, then improve your finances before you even consider buying a car as you probably can’t afford one.
As we finish up the third quarter of 2016, around 2 percent of total loans (and 9% of subprime) are 90 days late. This means those borrowers are very close to having their car repossessed. Since it can take weeks for the processes to occur, most of these people will lose their auto right as calendar year 2017 starts. Once again, this 2 percent may not seem like a huge percentage, but it equates to 6 million households. Now that is a large number.
What may be most surprising to us is the fact that the economy is very strong. The unemployment rate is under 5%, millions of jobs go unfilled, and incomes are rising. Yet millions of people may have their car taking back by their lender in 2017. So even though the unemployment rate is one half of what it was during the 2009 recession, can loan delinquencies are approaching those recessionary levels.
So what will happen when the economy slows, or when the next recession starts? As it will occur, and in fact we are overdue for a recession. If people are borrowing too much money now to buy a car, or turning to risky subprime loans, then many more millions of people will find themselves in serious trouble.