The Federal Reserve Bank of New York released a report that 7 million Americans are three months or more than 90 days behind on their car loan payments. It is a record that surpassed even the time of the wake of the financial crisis.
Economists are concerned with these numbers because it is definitely a red flag. It is unusual because the economy is stable and the rate of unemployment is quite low, so it is a question why Americans are having a hard time to settle their bills. According to economists at the New York Fed, possible reasons why borrowers are unable to pay on time because an increase in the labor market is not benefiting all Americans.
You need a car to get to work, travel from one place to another, or go on a vacation road trip. So the first thing you pay off in your bills aside from your home mortgage or rent is your auto loan. If people are not able to pay off their car loan, they can lose their car and make things difficult for them. So when the car owner is unable to pay for their auto loan, it can be a sign that the people in the class of working and low-income is under great pressure.
The New York Fed also stated that at the end of last year, there is a huge increase in the number of stressed borrowers, which is more than a million higher than there were in 2010 when the percentage of unemployment reached up to 10% which also increased the rate of auto loan debts. But now, it’s very alarming because a large number of people still can’t pay off their auto loan debts even if the percentage of unemployment is down to four percent and the job openings have increased.
People who are unable to pay their bills in time are mostly under the age of 30 and have credits scores that are quite low. So it can be a possible conclusion that younger people are having struggle to both pay their auto loans along with their student loans.
Statistics show that auto loans increased along with the increase in cars that were sold during the past years. And in 2016, records showed that over 17 million cars were bought in the United States. There is a steady increase in the rate of auto loan borrowers since 2016 even there are more people employed.
Experts are beginning to warn Americans to be cautious about where they apply for auto loans. It is suggested that they should look for credit unions and traditional banks who offer smaller rates that auto finance companies. There is a higher percentage of people who are unable to pay their bills within 90 days of the auto loans that they got from auto finance companies than people who got their auto loan at credit unions.
Rates that are given to borrowers are depending on their credit score and where they get their auto loan. Based on NerdWallet, If a borrower has a credit score of 661 to 780 they can get a rate of 4.5-6 percent in their auto loans. And if a borrower has a lower than 600 credit score, they can get a rate of 14.5-20 percent.
Auto loans are much easier to apply to than home loan because it has lesser restrictions, so experts warn borrowers to be careful when they get an auto loan. Consumers should look carefully into the details of the loan their taking or you can get into a huge debt. Companies can convince you to get a loan by using their tactic to make the loan look affordable and easier to pay. They give you the option of six to seven years to pay rather than the past where you need to complete your payment within four or five years.
With the technology today, if getting an auto loan is easier, it is also easy for auto loan financing companies, credit unions, and banks to repossess a car when a borrower is unable to pay off their loans. When a car owner forgets to make a payment, their cars can be equipped with a device that can make it unable to turn on when the owner uses it. And companies can easily get the location of your car and tow it away.
With the millions of people unable to pay their auto loans, it is unlikely for them to break the financial system as home mortgages are still higher than 9 trillion compared to one trillion mortgages of the auto loan.