The U.S. economy is up. But so are unpaid subprime auto loan delinquencies, according to a recent study by the Federal Reserve Bank of New York. Tighter bank restrictions on auto loans and looser regulations on the subprime auto loan industry are delivering a one-two punch to low-income borrowers, burying them under mountains of debt.
The New York Fed’s Quarterly Household Debt and Credit Report
On November 14, 2017, the Federal Reserve Bank of New York issued its Quarterly Report on Household Debt and Credit for the third quarter of 2017. It showed a surge in consumer debt on a level not seen since the 2008 financial crisis. Forbes reports a summary if the study’s findings:
- Overall household debt is up to $13 trillion, $280 billion above the peak in 2008 and 16.2% above the low point of 2013’s second quarter
- Mortgage balances were up to $8.7 trillion, remaining the largest debt most in most households
- Unpaid mortgages were down. Only 1.4% of mortgages were more than 90 days behind
- Student loan debt made up $1.4 trillion, and 11.2% of borrowers are 90+ days delinquent
- Credit card balances increased by $24 billion, with 4.6% at 90+ days delinquent
- Auto loan balances made up $1.2 trillion, increasing by $24 billion, and 90+ day delinquencies were up to 4%
Subprime Auto Loan Delinquencies Push Consumer Debt Skyward
The New York Fed’s report singled out subprime auto loans as a problem for U.S. consumers in 2017. Subprime auto loans, including all loans issued to consumers with less than a 620 credit score, make up 70% of the market. That is $200 billion in loans. In the quarterly report, approximately 20% of new car loan originations were made to sub-prime borrowers.
When the report looked at auto loans issued by traditional banks and credit cards, the delinquency rate was at 4.4%. But non-bank lenders were far higher: around 9.7%. That’s a problem for borrowers with less than perfect credit, who are finding it harder to qualify for traditional bank loans.
The Senior Loan Officer Opinion Survey on Bank Lending Practices, issued by the Federal Reserve in October 2017, shows that since the middle of 2016, banks have been tightening their auto loan lending standards. They have increased the down payment they require, raised the minimum credit score, and tightened rules for granting loans to customers who don’t meet those minimums.
Low-Income Borrowers Turn to Auto Financers with Higher Interest Rates
Specialty auto lenders have been swooping in to fill the gap. They offer subprime auto loans to consumers who have been turned down for traditional bank loans. With their low credit scores, many low-income car buyers think they have no choice. They end up paying high interest rates and monthly payments, often adding up to more than their cars are worth.
When troubles arise, low-income borrowers fall behind on those high monthly payments, contributing to the high subprime auto loan delinquencies reported by the New York Fed. When that happens, they pay even more in penalties and interest, falling further behind. Ultimately, many of those cars are repossessed.
Read More: What to Do if Your Vehicle Gets Repossessed
The subprime auto loan market sets borrowers up for failure. But despite reports like that issued by the New York Fed, regulations on the industry remain minimal. This allows auto financers to take advantage of consumers desperate to buy a car.
Dani K. Liblang is a collections harassment attorney at The Liblang Law Firm, PC, in Birmingham, Michigan. She assists borrowers who fall behind on their subprime auto loans. If creditors are hounding you, contact The Liblang Law Firm, PC, for a free consultation today.