Borrowers Late on Car Payments at an All-Time High

Inside Subprime: March 19, 2019

By Grace Austin

The Federal Reserve Bank of New York announced last month that the number of borrowers who were late on their car payments reached an all-time high at the end of 2018, with 70 million people 90 days behind or more. That’s 1 million more people struggling to make payments than there were during peak delinquency levels at the end of 2010. Though the U.S. unemployment rate has dropped to 3.7 percent and the job market is robust, Americans are still struggling to pay their bills. People are borrowing money to purchase vehicles at record levels, even with rising interest rates, and some say delinquency rates are a bad sign for the economy.

“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector,” researchers with the Fed wrote in a blog post.

The data might also suggest that predatory lenders are issuing loans to people with more debt than they can cope with. The Fed noted that the largest share of vehicle loans are coming from banks and credit unions, issued mostly to borrowers with high credit scores. But subprime borrowers are also taking out loans, and the majority of late car payments are on loans issued to young people with low credit scores. These borrowers are getting their loans from auto finance companies or payday lenders with high interest rates that make the loans more difficult to pay off. The data shows that half of all outstanding loans from auto finance companies were issued to consumers with credit scores under 620. Loans from these companies also carry higher rates of past-due payments when compared to loans issued by banks or credit unions, even when controlling for credit score.

While most Americans struggle to keep up with their bills (78 percent of us are living paycheck to paycheck), delinquency rates are even higher among communities of color. The auto loan delinquency rate for people of color is 7 percent, even though these borrowers carry less debt overall than their white peers, who are only 3 percent delinquent. The data comes from an analysis released in December from the Urban Institute. People of color also have a lower average income than white borrowers, the analysis shows.

Despite the apparent impact of high-interest loans on delinquency rates, the regulatory environment in Washington has strayed away from protecting consumers. In February, the Consumer Financial Protection Bureau announced that it would rescind ability-to-repay requirements that would go into effect under the agency’s rule governing payday and title loans. The bureau contended that the rule, which was introduced under the Obama administration and has yet to go into effect, would limit access to credit for consumers. But consumer advocates argue that high-interest loans trap borrowers in debt, and the agency’s decision to side with payday lenders will inevitably cause financial harm to consumers.

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