According to findings published in CityLab, owning a vehicle
is one of the most powerful economic advantages a person can have. The findings
show a correlation
between car ownership and increased income, with those who own a car making
more than three times as much as those without. In some areas of the country,
such as Los Angeles, the average income of households with vehicles is as much
as 10 times higher than households without. That said, while car ownership is
certainly necessary for getting to and from work, grocery stores, doctors'
offices and daycare, is it really an indicator of financial success? Recent
reports, which reveal that auto loan delinquency rates are worse today than
they were at the peak of the recession, suggest not. In fact, findings indicate
that car ownership may be the reason for so many households' financial duress.
In the fourth quarter of 2018, the percentage
of auto-delinquencies—loans that are more than 90 days past due—soared to
4.47 percent of total loan balances. This rate is the highest it's been since
the first quarter of 2012 and just 0.6 percent lower than the peak of the Great
Recession in Q1 2011.
The number of Americans who are seriously delinquent on
their auto loans are at an all-time high as well, soaring to well over 7
million. That's 1 million more borrowers who are three months or more past-due
than at the end of 2010, which is the peak of overall delinquency rates.
What's even more shocking are the numbers. Since the second
quarter of 2008, the number of auto loans issued has only increased by 28
percent, from 88 million to just 113.4 million. However, the outstanding debt
has nearly doubled in the past decade and now stands at a whopping $1.27
trillion. What these numbers suggest, says the New York Fed, is that not
everyone has benefited from the strong labor market.
Though subprime borrowers hold just 22 percent of the total
auto loan debt today—down from the nearly
31 percent in 2008—many financial analysts attribute the outstanding past-due
balance to this group of individuals. According to the Federal Reserve Bank of
Kansas City, though the delinquency rates are on the rise and have been since
2015, the rise appears to be largely driven by subprime borrowers.
Delinquency rates among those with credit scores of less
than 620 rose from 12.4 percent in 2015 to over 16 percent in the second
quarter of 2018. This rate is right on par with the subprime delinquency rate
at the end of the first quarter of 2010.
The delinquency rates of prime borrowers—who happen to
account for the majority of outstanding auto debt—remain unchanged from the
recession and hover right around 0.3 to 0.4 percent. While some experts believe
these numbers show that subprime borrowers have a higher risk profile than
prime borrowers, others believe longer loan terms and sky-high interest rates are
responsible for the vast number of default loans.
Many are quick to point the finger at subprime borrowers for
high delinquency rates across any industry, claiming they are irresponsible
with money. However, several reports suggest that maybe lenders are the
irresponsible parties.
The vast majority of auto financing options geared toward
Americans with low income and poor credit scores are fundamentally
predatory. For instance, the average car loan for a prime borrower is 4.16
percent for a new car and 5.68 percent for a used car. For a nonprime borrower,
that interest rate is slightly higher at 7.05 percent for a new car and 10.44
percent for a used car. These interest rates are assuming a borrower agrees to
a loan term of 60 months.
THE AVERAGE CAR LOAN FOR A PRIME BORROWER -
4.16% FOR A NEW CAR
5.68% FOR A USED CAR
FOR A NONPRIME BORROWER -
7.05% FOR A NEW CAR
10.44% FOR A USED CAR
For a subprime borrower, the interest rate on a new car is
as high as 11.35 percent. That rate skyrockets to 16.92 percent for a used
vehicle. Deep-subprime borrowers can expect to pay between 14.07 and 19.81
percent respectively for a new or used car loan.
To give you an idea of just how much in interest one would pay
as a subprime or deep-subprime borrower, take a $14,000 used vehicle with a
60-month loan term for example. At 16.92 percent interest, the monthly payment
would be $347.43. At the end of the 60-month term, the grand total would be
$20,840.15, which means one would have paid $6,840.15 in interest alone.
For a deep-subprime borrower, the monthly payment would be
$369.44. The total cost of the vehicle at the end of the loan term would be
$22,165.97, which means the borrower would have paid $8,165.97 in interest, or
more than half the value of the new used car.
The worst part is that the average loan term is no longer 60
months. In 2010, when interest rates on auto loans were more or less the same
as they are today, the average
loan term was 61 months, with the longest average being 67 months. Today,
the typical
loan length is 68 months, with more and more borrowers opting for terms of
up to 72 to 84 months. Longer loan terms invariably translate to higher
interest rates.
Did you get locked into a subprime or deep-subprime loan you
cannot afford? If so, you're not alone, and you are not as stuck as you think
you are. A credit repair company
can help you fix your credit so that you can refinance for a lower interest
rate and save some money. Contact CreditRepair.com today for a free credit
evaluation.
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Sources:
https://www.cnbc.com/2019/02/01/auto-loan-rates-are-some-of-the-highest-in-a-decade-how-to-save.html
https://www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates
