Why Are So Many Recent Car Loan Borrowers Missing Payments?

Like my new wheels? I got it through an 8-year loan with a 22% APR. What a steal! [Note: Not actually my car] (photo Axion23)

Like my new wheels? I got it through an 8-year loan with a 22% APR. What a steal! [Note: Not actually my car] (photo Axion23)

In 2014, new car sales increased to 16.5 million, the highest level since 2006, but did too many car buyers take on more than they could afford?

A Wall Street Journal/Moodys report looks at just those consumers who took out a car loan in the first quarter of 2014. In that short period of time, more than 2.6% of these borrowers have missed at least one payment.

That percentage might not seem terribly high to you, but it is the highest level of early loan trouble since 2008. At that time, early delinquencies rose above 3% just before the housing market crashed.

During the recession, lenders tightened their underwriting restrictions, making it more difficult for loan applicants with less-than-pristine credit to qualify for car loans. But as the economy stabilized, banks began opening up those loans to subprime borrowers.

In 2013, around 1-in-4 car loans were written to subprime borrowers, some of whom faced interest rates higher than 20%.

So while these consumers had more access to credit, that credit may have come at a cost that some could not afford.

The WSJ analysis found that 8.4% of subprime auto loan borrowers during the first quarter of 2014 had missed at least one payment by November. Again, this represents the highest early delinquency level since 2008, when passed the 9% mark.

While the general level of all car loan borrowers who have missed at least one payment (3.4%) is slightly from 3.2% during the same time last year, that rate is still below the 4.2% high water mark from 2009.

The U.S. Office of Comptroller of Currency, which regulates the largest banks, says that it has seen a trend toward relaxed standards and riskier behavior in auto loans.

“We’re putting banks on notice that we have concerns,” the OCC’s deputy comptroller of supervision risk management tells the Journal. “It’s definitely an area that warrants some attention.”

Last summer, the Dept. of Justice issued a subpoena to General Motors regarding its subprime auto loans, requesting that the car maker turn over documents related to the underwriting criteria it used to make subprime auto loans since 2007, as well as information about the representations GM made about the criteria when the loans were pooled into securities.

If you’re in the market for a new or used car and need to take out a loan, please remember to not be sweet-talked into buying a more expensive vehicle just because you can get financing. Buying what you know you can afford — even if it’s not going to turn heads in the parking lot — is the best way to avoid missed payments or being saddled with a car you’ll take big loss on when you eventually resell it.