Auto loan balances that are ninety days or more past due sat at 5.49% in the second quarter. The peak during the Great Recession was 5.27%. Credit card delinquency, by comparison, is running near 2.9%. Americans are falling behind on their cars at a rate they never reached during the worst credit crisis in living memory, and they are doing it while employed.
Why Cars And Not Cards
This is the part that breaks the usual pattern. In a normal downturn people stop paying credit cards first, because a card is unsecured and the consequence is a phone call. The car gets paid because the car gets to work.
The fact that auto delinquency is at a series high while card delinquency is roughly normal says the problem is not general distress. It is that car payments themselves have become unaffordable. Vehicle prices ran up hard, loan terms stretched to seventy two and eighty four months to keep the monthly payment palatable, and insurance and repair costs climbed on top of the payment.
A household can be current on everything else and still be underwater on one specific obligation. That is what this number describes.
The Negative Equity Trap
Long loans and fast depreciation combine badly. A buyer three years into an eighty four month loan often owes more than the car is worth, which means selling it does not solve the problem. You cannot downgrade out of a payment you cannot afford if closing the loan requires writing a check.
Dealers have a solution for this, which is to roll the shortfall into the next loan. That converts a bad payment into a worse one attached to a newer car, and it is how borrowers end up financing two vehicles in a single note.
What Repossession Actually Costs
The car goes to auction, the auction price is applied to the loan, and the borrower is billed for the difference plus fees. Losing the car does not end the debt. It ends the asset.
Final Take
If your own payment is the strained one, act before the sixty day mark, not after.
Call the lender and ask specifically about a deferral or a term extension. Lenders would rather restructure than repossess, because repossession is expensive for them too, but they will only discuss it with a borrower who is current or barely late. After ninety days the file has usually moved to a department with no authority to negotiate.
Also price refinancing at a credit union before assuming it is impossible. Rates on refinanced auto loans at credit unions routinely run several points below what captive finance arms charge, and several points on a $30,000 balance is a real monthly change.
And if you are shopping rather than struggling, treat any loan term past sixty months as a signal that the car is too expensive, not that the financing is generous.
Written by Deniss Slinkins
Millionaire Core
