Why Are Some People Having A Harder Time Paying Off Car Loans Post-Recession?

carloangraphFor many of us, things have improved since 2010, when the country finally began clawing its way out of the crater that resulted from the collapse of the housing market. So why are some consumers doing a worse job of making car loan payments than they were during the recession?

Bloomberg looked at the above graph comparing delinquency rates on auto loans made to subprime borrowers before and since 2010.

The white line represents delinquency rates on these loans issued between 2003 and 2009, and shows what you’d expect — that during the heart of the recession and the first few years of recovery, around 4-5% of subprime auto loans were delinquent.

But the yellow line is the head-scratcher. It represents delinquency rates for loans issued from 2010 to the present day. One would expect, with more financial stability and improved employment levels, that the delinquency levels would be lower than during the recession when many people had to scrounge for cash. Instead, the delinquency rate has been higher than during the bust years. And it actually peaks at around the 3.5-year mark, indicating that those who took out loans at the initial stages of the recovery are having the hardest time making payments.

In looking at the numbers, Sara Zervos from Oppenheimer reminds Bloomberg that while we may technically have been in a recovery at that point, “Things weren’t that great in 2010.”

There was still high unemployment and many consumers had credit reports with more dings than a car left out in a hail storm.

“Car makers just want to sell cars,” explains Zervos, theorizing that auto loans were likely given to people who should not have qualified. “There’s a lot of scrutiny on the home lending front; massive scrutiny on the supreme crisis. Not so much scrutiny on the auto side.”

Additionally, the pre-2010 numbers have to reflect that things were good for most people until around 2008. They still had income, still owned their homes.

What goes unmentioned in the Bloomberg piece but is worth considering is that a number of the people who lost their homes to foreclosure continued to make car payments while they allowed their mortgages to sink into default. It can take years for a home to be seized and sold off, but it only takes a few minutes for the repo man to snag a car out of the driveway. And you can live with friends or family while looking for a job; it’s much harder to rely on them to drive you to job interviews, so the car remained a necessity for many.

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  1. mobafett says:

    With “ungood” credit, we fell into the trap that we could only finance a car we couldn’t afford. We could afford to finance a car for around $5000, but could only be approved to finance a car worth $10,000, with specific restrictions from the loan companies. They wanted a newer, American-made car with a low odometer reading, so that it would retain value should it need to be repossessed. The problem was that we really needed a car. The old one needed more repairs that what it was worth, and we had no other options.
    It’s a trap in which I believe many of us have been caught. With our last car purchase, we were fortunate to receive an insurance settlement on a totalled car which allowed us to buy another vehicle without financing. A completely different situation — we determined what we could afford, rather than having a loan company force restrictions on us.

    • econobikerredux says:

      “The old one needed more repairs that what it was worth”

      If you pay retail pricing, most cars always need more in repair cost than they are worth. However, if you get to know the underbelly of the auto repair industry you often can get used parts installed by home mechanics.

      Example: my sister needed a transmission replacement on a mid2000s Taurus model year which was known for having bad transmissions. Major chains quoted $1200-$1500 to remove, rebuild, replace, etc.

      After verifying (via la googling and auto enthusiast forums) what model years after her car had the “good” transmissions and would fit hers, she was able to PAY someone to get a junk yard one for $250. Then said transmission was dumped into the trunk of the car. After hunting around (ie: asking people in the service industries like maids, janitors, etc) she was able to find a connection to get it put into the car for $300 in an area of town not well traveled by the more wealthy folks or law abiding folks. Cash $100 up front and $200 when running car was delivered and she had a running car again. $550 and she had a car valued at $1500 on the road again.

  2. Airwave says:

    This article is dated May 2nd but I just heard it on the radio a few days ago. Subprime loans now on cars: http://www.bubbleblowers.com/homemade.html

    The article says people will always make their car payments. Americans love their cars!