0138 GMT January 23, 2020
More than seven million Americans are already 90 or more days behind on their car loans, according to the New York Federal Reserve, and serious delinquency rates among borrowers with the lowest credit scores have by far seen the fastest acceleration, according to Reuters.
The seeds of the problem are buried deep in the financial crisis, when in the midst of the worst economic downturn since the Great Depression, automakers slashed production. A decade later, that has made a relative rarity of used 10-year-old vehicles that are typically more affordable for low-wage earners.
According to data provided to Reuters by industry consultant and car shopping website Edmunds, the average price of that vintage of vehicle is $8,657, still nearly 75 percent higher than in 2010 despite some softening in prices over the last year. The average new car, in contrast, has seen a price rise of 25 percent in that same time period.
“This is pinching people at the worst point possible,” said Ivan Drury, Edmunds’ senior manager of industry analysis. “If you need basic A to B transportation, you have to get an older car that needs more repairs and has more wear-and-tear issues.”
Monthly auto payments for Americans making under $40,000 have remained flat since 2017, while those in higher wage brackets have seen their payments rise, according to a Cox Automotive Inc. analysis for Reuters.
On the face of it, this might seem like good news. But to Cox chief economist Jonathan Smoke, it indicates poorer Americans are stretched so thin they cannot afford to pay more.
“They just don’t have any flexibility to increase their payment,” Smoke said.
Weak lending standards in recent years are partly to blame for the rising delinquency rates, which Warren Kornfeld, a senior vice president on Moody’s financial institutions team, said are approaching record highs despite a solid economy.
Auto lenders are belatedly tightening lending standards, but it may already be too late, he said.
“The economy is masking the true performance of auto loans,” Kornfeld said. “If we hit a downturn today, the performance of auto loans would not look very good.”
Research from the New York Fed earlier this year showed that while delinquency rates among borrowers with high credit scores have remained steady and low, for subprime borrowers they have been rising, pushing up the overall delinquency rate. Around eight percent of loans originated by lower-score buyers with a credit score below 620 were categorized as seriously late, “a development that is surprising during a strong economy and labor market,” Fed researchers wrote.
‘Hard to make ends meet’
Like many Americans, for Hollis Heyward no car means no job. The 30-year-old father of two makes $10 an hour working at a warehouse in Freeport, a rural town of 25,000 about 115 miles (185.07 km) northwest of Chicago.
Heyward can only get to work by car.
In the midst of a divorce, all he could afford was a gray 2005 Pontiac Grand Prix with close to 200,000 miles on it, which he bought for $1,300 cash — a fraction of the average new car price.
Suddenly also stuck paying off the loan on his future ex-wife’s car, Heyward had to rework the loan with local used-car dealer Gordy Tormohlen of Good People Automotive. Under his ‘workout’ deal, Heyward is paying the loan’s principal only and Tormohlen has waived the interest payments. Heyward’s monthly payment is now around $120 per month, down from around $350 before the workout.
“Right now, it’s hard to make ends meet,” said Heyward. “But I am not the kind of guy to walk away from my commitments.”
Tormohlen, 59, a second-generation dealer, said his business is up 10 percent this year as auto finance companies tighten lending standards. He said the market feels like it did before the financial crisis hit in 2008, when consumers were over-extended with debt.
“Americans have grown too comfortable with debt and the time has come to pay the piper,” he said.
Tormohlen is a “Buy Here, Pay Here” dealer, offering subprime loans that he finances himself at 19 percent, which is higher than a bank but lower than many finance companies.
He said he can work directly with struggling customers like Heyward, whom he has known for a decade, but worries that large finance companies with tens or hundreds of thousands of borrowers will be in deep trouble when a downturn hits.
Indeed, according to the New York Fed, more than one million more Americans are behind on their car loans now than at the peak of delinquencies in 2010 after the financial crisis.
“The big lenders who do not know their customers are going to have a problem when the economy turns,” Tormohlen said.