Auto loan defaults have been on a steady decline, except for one segment – the subprime market of loan holders with credit scores below 620. According to the report on household debt recently released by the New York Federal Reserve, almost 10% of auto loans made to borrowers in the subprime market were delinquent by 90 days or more.
Approximately 23 million borrowers hold a total of $300 billion in outstanding subprime auto loans – which by definition contain higher interest rates that make it more difficult for these borrowers to remedy a delinquency.
According to the New York Fed report, most of the subprime delinquencies are held by finance companies. While the delinquency rate is around 4% for subprime loans issued by banks and credit unions, finance companies have a 9.7% default rate. Finance companies also hold approximately two-thirds of the total subprime auto loan debt – in essence, verifying the risk factors associated with subprime loans.
Auto loan originations remain high in the third quarter of 2017. The $150.6 billion value reported by the Fed is the second-highest level in over a decade. However, there has been some market correction to reduce the subprime risk. Auto loans to consumers with credit scores below 660 decreased by 8.3% over the previous quarter, while loans for borrowers with scores over 660 increased by 5.4%.
A corresponding blog by the New York Fed suggests that banks and credit unions are taking extra underwriting precautions to prevent risky auto loans. This logically drives shakier loans to the finance companies, which have been more willing to accommodate the subprime market – so far.
If you are delinquent on your auto loan, what can you do? Generally, it's best to follow the old maxim, "When you realize that you're in a hole, stop digging." You can't pay anything down if you have no surplus funds, so the first step is to re-evaluate your spending and income.
Either you will need to find more income such as a second job or selling some possessions, or spending will have to be cut. If you don't have a budget, start one now so you can decide how to rearrange your cash flow. Seek outside help if you are having trouble making a budget or assessing your best options.
Once you have money to apply to the budget, you can either start making the payments along with any penalty fees and interest, or you can try to negotiate terms that you can afford (for example, lower monthly payments over a longer term). Your creditor doesn't want your car – they simply want your cash. However, beware of third-party negotiators.
As Greg McBride, Chief Financial Analyst for Bankrate.com, notes, "Don't fall for this idea that another company's going to be able to resolve this for you if you just pay them some fee. If you're looking to settle previous debts, it's best that you deal directly with either the creditor themselves or the collection agency that now owns that debt." Before engaging anyone else to negotiate for you, verify what that party brings to the table and whether it's worth the price.
The best defense against a subprime auto loan delinquency is a good offense. You are considered subprime for a reason – risk of default. Don't be tempted to buy a better car than you can afford. Keep your monthly payments at a level that you can afford, and apply the budget discipline to ensure that you make payments on time. That's the path to escaping subprime status – and eventually, to being able to afford a better car.
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