Auto loan defaults rise. What to do if you struggle with payments

For an increasing proportion of car owners, the monthly auto loan payment is developing into a problem.

According to a recent report from Cox Automotive, borrowers who are more than 60 days behind on their payments represent a small portion of all outstanding auto loans – 1.84% – moving up their ranks. The share was higher at 26.7% in December compared to the year-ago month and is largely concentrated among borrowers with low credit scores.

Certified financial planner Angela Dorsey, founder of Dorsey Wealth Management in Torrance, said, “The risk of struggling to pay off an auto loan is not only the risk of repossessing your car, it has long-term effects on all other areas of your finances. ” , California.

A combination of market factors has driven up the monthly loan payment. And as personal savings dwindle and persistent inflation strains household budgets, making payments can be even more challenging.

The average price paid for a new car in December reached a record $47,362, according to an estimate by JD Power and LMC Automotive.

According to Edmunds, monthly payments averaged $717 in the fourth quarter, compared to $659 a year earlier. The share of buyers with monthly payments of $1,000 or more reached 15.7%, compared to 10.5% a year earlier. In the fourth quarter of 2020, only 6% of borrowers had monthly auto payments that large.

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Rising interest rates have also affected affordability. The average rate paid on a new car loan at the end of 2022 was 6.5%, Edmunds data show. For used cars, the average was 10%. A year ago, these rates were 4.1% and 7.4%, respectively.

While the auto loan delinquency rate is on the rise, according to Cox, the default rate is not. Entering default — when your lender determines you’re not going to make payments, usually some time after 90 days of payments — can translate into taking your car back.

Yet being too late with a payment has a negative impact on your financial life, and it can be long-lasting.

“If you’re 30 days late, it affects your credit score,” said Brian Moody, executive editor of Kelley Blue Book.

This usually happens when lenders report late payments to the credit-reporting firm Equifax, experian And transunion,

Also, you should know that because your payment history is the single most influential factor in your credit score – it typically accounts for 35% of it – you could see a 100-point drop from being 30 days late with a payment. According to NerdWallet. The longer the loan goes unpaid, the bigger the impact on your score, and the delinquency can remain on your credit report for up to seven years.

As consumers are commonly aware, the lower your score, the higher interest rates you are likely to pay on new loans or credits you get. In addition, a bad score or bad credit history may cause you to pay higher premiums on auto or home owner’s insurance and may affect your ability to rent an apartment or even get a job. . Employers can’t see your score, but they can see your report.

For car owners who are absolutely certain they are headed toward crime, it’s important to try to stop the problem from snowballing.

Moody said, “If you think it’s coming, stay on top of it.” “Do nothing. It won’t get better on its own.”

Experts say that if you’re struggling to stick to a budget well, it’s at least potentially fixable. In that case, take a look at how you’re spending the money.

“Take a look at your total expenses for the last few months,” says Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union. “You’d be surprised how much the average person spends each month without knowing it.”

However, if the payments just aren’t manageable, the first thing you should do is get your lender in the loop.

“If a consumer is struggling to make their car payments, or anticipates challenges ahead, they should reach out to their financial institution as soon as possible,” Pendergast said.

“The sooner your bank or credit union is made aware, the easier it will be to come up with a possible solution,” he said.

While options vary from lender to lender, you may be able to get a deferment—that is, a few months without payments—or a new loan that reduces payments by extending the length. Either way, be aware that this will usually lead to paying more in interest, noted Moody’s. Kelley Blue Book.

However, a postponement will at least give you time to figure out how to best manage your situation, he said.

For example, you might sell your car with the intention of buying one for less – or, if you have other transportation options, perhaps even without it. Just be aware that depending on how much you owe on the loan, the price you get for your car may not completely cover your balance, meaning you still owe the lender money. Will pay

There can be a difference of equal value if you choose to trade it. While trade-in amounts have been relatively high due to high used car values, this is changing. The latest inflation reading showed a decline of 8.8% year-on-year in used car prices.

And if a dealer is willing to give you an amount that is less than what you owe on the loan, you will either have to pay off the balance or incorporate it into your new loan. This so-called negative equity averaged $5,341 in the final quarter of 2022, Edmunds data shows.

“None of these [options] are ideal,” said Moody. “They all fall under the heading ‘Better Than Nothing’.”