For many Americans, owning a car is central to their families’ financial stability. Americans use cars for commuting to and from work, participating in the gig economy, and dropping off and picking up their children from day care.
Auto loans are supposed to lead to car ownership, but some Americans have delinquent auto loans (meaning they are 60 or more days late making their loan payment). Delinquency signals broader financial troubles and suggests that borrowers could lose or have already lost their car, putting their overall stability at risk.
Success with auto loans varies by region
Nationally, the delinquency rate for auto and retail debt is 4 percent, but this rate ranges for consumers with a subprime credit score from 55 percent in some counties to 0 percent in others. (Auto loans make up the majority of the auto-retail combination, with 77 percent of these consumers having auto loans or leases reported on their credit records.)
States with the highest shares of auto-retail loan delinquency rates are Alabama (9 percent) South Carolina (8 percent), and Louisiana, Mississippi, New Mexico, and Texas (7 percent).
And those with the lowest shares (all at 2 percent) are Maine, Massachusetts, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming.
Nationally, the auto-retail loan delinquency rate is more than three times higher—13 percent—for borrowers with a subprime credit score. We measure people’s credit scores in the year before we see them with an auto delinquency, so many of these consumers could have received subprime auto loans with worse loan terms and then struggled to repay.
States with the highest auto-retail loan delinquency rate among borrowers with a subprime credit score are Alabama (21 percent), South Carolina (20 percent), and Tennessee (18 percent)
And those with the lowest share are North Dakota and Oregon (8 percent), and Maine, Massachusetts, and Nebraska (9 percent)
These rates are based on Urban Institute credit bureau data and may not fully capture people in the “buy here pay here” auto-lending space, where the loan costs and delinquency rates can be much higher.
Why should we care about auto loan debt?
When a borrower becomes delinquent on an auto loan, resulting in repossession of the car, they lose much more than a mode of transportation, they lose the ability to participate in the economy. Repossession can stay on a credit report for seven years—negatively affecting the borrower’s credit report—which can affect the borrower’s future success in getting a job or renting an apartment.
Getting a new car is difficult until a repossessed car is paid for, since lenders are less likely to approve a new loan or provide favorable loan terms if they do so. Not having a car can pose challenges to commuting and getting children to and from child care. Cars are repossessed as quickly as after one or two missed payments, and some experts say the process may happen more quickly for borrowers with a subprime versus prime credit score.
Repossession is also expensive. A borrower may have owed $2,000 on a car before it was repossessed but could owe thousands more after collection costs. If a car is auctioned off, a borrower could legally owe the deficiency balance—the difference between what you owe on the contract (plus repossession, sales, and contract fees) and the auctioned value—which can be significant.
What can be done about this problem?
Geographic differences in rates of delinquent auto loan debt raise questions about policy environments and consumer protections. Does the state have rules about how a creditor may repossess and resell a car? What are the allowable loan terms in areas with high rates of delinquency? Are longer loan durations, which lead to higher overall cost, being pushed in counties with lower incomes? Is the loan-to-value ratio higher? Do the loans include more add-on products? Do state deficiency policies favor the lender, thereby limiting consumers’ ability to recover from repossession? Researchers and regulators should address these questions to arrive at consumer-friendly strategies.
The issue of predatory car lending has even captured the attention of comedian John Oliver, who noted, “it’s another example of when you’re poor, everything can be more expensive.”
Borrowers can also take steps to ensure they receive a fair deal:
- Don’t shop by monthly payment. This avoids giving the lender the ability to shape loans in way that comes out best for them by extending the loan period and increasing the overall amount that you pay. Shopping by monthly payment can also result in consumers owing money on a car that no longer works.
- Know your options. Walk into the dealership with another loan offer in hand. For example, get a loan offer from someone outside of the dealership, like a credit union or bank.
- Don’t be afraid to walk away from a deal if you are uncomfortable.
Borrowers who will be late in repaying their car loan or lease should contact their creditor as soon as they realize to hear their options. If you reach an agreement, get it in writing.