Love that new-car smell? Wish you could replace the high-mileage car you’ve had for several years? Well….if you’re like many Americans, when you go to trade in your “clunker,” you might find that its value is lower than the money you still owe on it. You also might be surprised to find out how much the cost of a new car has gone up, and that conversely, it is getting a little more difficult to qualify for a loan on the type of car you’re dreaming of. If you succumb to a loan that spans 5 – 8 years, you will end up paying thousands of dollars more than the purchase price and find yourself in the same tight spot the next time you want new transportation with the latest bells and whistles—and that new-car smell!
Say you manage a collection agency or you’re an attorney specializing in debt collection. You are probably already aware that auto loan deficiencies (those where payments are at least 30 days past-due), are second only to student loans, when it comes to the debt owed by the average American family. When an auto loan lender repossess a car, it is usually auctioned off. Whatever is collected at auction is deducted from what is still owed on the car loan. What’s left is the “deficiency balance.” This “paper” is often sold to debt buyers who then send the debts to a collection attorney. Sometimes the attorney will sue in order to collect. The original owner can end up with a judgment that isn’t going to go away, in fact the amount may grow due to the interest rate set by the court.
Debt Collection Stages
Hopefully, if they want to keep a customer, the creditor will make it clear to the consumer (the person who bought the car) what the collection stages are, should they be unable to make payments:
- Settle the deficiency amount while it is owed to the original lender
- Settle with a collection agency that the original lender sent the deficiency balance to for collection
- Settle with a debt buyer after the deficiency balance is purchased
- Settle with a collection agency the debt buyer assigns the deficiency debt to for collection
- Settle with an attorney that the lender or debt buyer hires to collect on the deficiency
Most debt collectors will try to convince the consumer/debtor that they will save more money the earlier they are able to settle. They may even try to negotiate a payment plan or settle for a portion of the total debt, if the lender gives them that option. However, once the debt is in the judgment phase, the debtor is usually out of options.
Recent Auto Loan Stats
According to money-zine.com, 74% of consumer debt—not counting mortgages–is derived from automobile loans, then student loans, as well as some loans for boats, trailers, or even vacations. Recent data from Experian reveals that the average loan term for a new car in the U.S. is 68 months—an all-time high. That means some consumers are taking eight years to pay off a car they can’t really afford. The average amount financed is $30,032, and the average monthly loan is $503, a first-time high for both. So much debt for a depreciating asset often leads to not being able to make the payments at some point down the road.
Delinquencies in closed-end loans, such as auto loans, rose in the fourth quarter of 2016 while delinquencies in open-end loans, such as credit cards, fell, according to the latest American Bankers Association’s Consumer Credit Delinquency Bulletin. One might think that consumers with a fixed income and shaky credit who need a better car would be better off buying a used car with fewer miles. However, the cost of used cars is also going up. The average loan on a used car bought at a dealership is running about $21,000 and carries an average $380-a-month payment. “It’s no longer that easy to pick up a used car for $5,000 to $10,000 that’s in good condition. Those deals are getting harder to find,” said Ivan Drury, a senior analyst at Edmunds.com. “People will probably have to go to a dealer to buy a used car, and they will pay more.”
Auto Loan Lenders More Cautious
“The gloss is fading a bit on auto lending as delinquencies rise,” said James Chessen, chief economist at the American Bankers Association. “Institutions will be more careful as they think about how aggressive they will be in lending, knowing there are early signs that some people are having difficulty paying back their loans….When that new car smell disappears, there is still a monthly payment that needs to be made. Thoughtful and realistic budgeting over the life of the loan is the best protection against becoming overextended.”
There are consumers who have upside-down car loans, where the value of the car is worth less than what the car is costing them. It’s often due to higher interest, because these consumers are a higher credit risk. They go to places that will take a higher-risk customer, but they end up buying lower-quality cars at a higher price, and all too often the loan outlasts the car. When that is the only option for a car loan, there are usually other debt payments to make, and the person is living paycheck-to-paycheck. One unexpected expense can lead to delinquency.
For a time during the 2007-09 recession, it was difficult to qualify for a new or used car loan. But as credit began to loosen up around 2013, banks and other lending institutions began vigorously pushing auto loans, even subprime loans to meet pent up car-buying demand. Gus Faucher, chief economist at PNC Bank, in Pittsburgh, said “We have seen auto sales slow in 2017, and some of that is because lenders are pulling back.” He added that 17.5 million new cars were sold in 2016. This year’s new car sales are running at an annual rate of 17 million.
Auto Sales Still at a Record High
While cars top the list of late payments, consumers also have overextended themselves on other loans, according to the American Bankers Association. Credit advisers at the nonprofit Advantage Credit Counseling Service in Pittsburgh suggest that consumers hold their car expenses to between 10 percent and 20 percent of their income. That includes payments, auto repairs and insurance.
It looks like auto sales will have another record year, despite a dip in May, but consumers are also spending more on cars and trucks than ever before, and signing up for larger monthly payments and loan terms than they ever have. Even collection agency owners and collection attorneys may be seduced by that new car smell, although they are well aware of the risks. While they may have more debt collection opportunities, they may also end up feeling a little strapped by sky-high car payments.