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Rising Auto Loan Defaults are a Distressing Signal

DebtDefense

It has been said that the housing bubble burst between 2006-2008. But that analogy makes the economic collapse sound like it was a one time, explosive, and perhaps unexpected thing. In fact, it wasn’t. If we look back on the economy we would probably find that people, slowly but surely, were starting to fall behind on their mortgage payments long before the 2008 collapse. 

Auto Loan Defaults Rising

History repeats itself and it is doing so again. This time, the statistics show that it is happening with car payments. The Federal Reserve recently announced that 7 million car loans were behind in payments by 90 days or more. That’s the most since 2011, in the height of the recession.

Because cars loans are secured by the cars themselves, and because cars are such an integral part of our daily lives, people that are hurting economically tend to pay car loans before they pay off other types of loans or debts, such as credit cards or medical expenses. That’s why a high default rate is an indicator that the economy may not be as strong as people think.

Some say the increase in defaults is because there are more car loans today than in the late 2000s. But others maintain that auto lending will be the next bubble to burst.

Subprime Loans

There are more loans because the auto industry seems to be copying the housing industry’s worst habits–providing subprime loans to people who can’t afford to pay the loans back.

Auto lenders are offering loans with excessive interest rates to borrowers who may not understand what they are getting into. Lenders may offer loans with extended repayment periods in order to lessen payments. But unlike a house, cars tend to break down or lose their effectiveness when repayments are made over 6, 7 or 8 year periods.

Discrimination

Discrimination in auto lending is also a concern, as the industry is less regulated than housing. The Consumer Protection Finance Bureau fined Toyota, Ally, and Fifth Third Bank for discriminatory lending practices, including overcharging black and Hispanic borrowers.

If all of this isn’t bad enough, just as investors put money into securities that were backed by mortgages, so too are there investors in bonds that are backed by auto loans.

Investments once thought to be low or no-risk, are now being re evaluated in light of the surging default rates. Soon we may see repossessions and deficiency cases brought once again by trustees of loan pools, just like we did (and still do) in housing foreclosures.

At Jacobs Legal in Miami, we help consumers who are behind with bills or being harassed by debt collectors. Contact us to schedule your free initial consultation if you have been treated unfairly regarding a debt that creditors say you owe.

Resources:

usa.streetsblog.org/2019/02/13/americas-car-centric-transportation-policies-are-driving-us-to-ruin/

cnn.com/2019/02/13/business/delinquent-car-loans/index.html

https://www.jakelegal.com/what-does-a-credit-reporting-agency-have-to-do-when-you-dispute-an-item-on-your-credit/

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