Photostorm | E+ | Getty Images
For an increasing proportion of car owners, the monthly auto loan payment is developing into a problem.
While borrowers who are more than 60 days behind on their payments represent a tiny portion of all outstanding auto loans — 1.84% — their rank is rising, according to a recent report From Cox Automotive. The share was higher at 26.7% in December compared to the year-ago month and is largely concentrated among borrowers low credit score,
Certified financial planner Angela Dorsey, founder of Dorsey Wealth Management in Torrance, said, “The risk of struggling to pay off an auto loan is not only the risk of repossessing your car, it has long-term effects on all other areas of your finances. ” , California.
Higher prices, interest rates have led to larger payments
A combination of market factors has driven up the monthly loan payment. and as personal savings have shrunk and persistent inflation broke the household budgetGetting paid can be even more challenging.
The average price paid for a new car in December hit a record $47,362, according to an estimate by JD Power and LMC Automotive.
According to Edmunds, monthly payments averaged $717 in the fourth quarter, compared to $659 a year earlier. share of monthly buyers payment of $1,000 or more rose to 15.7% compared to 10.5% a year ago. In the fourth quarter of 2020, only 6% of borrowers had monthly auto payments that large.
More from Personal Finance:
How to protect yourself from tax fraud and scams
What the Fed’s interest rate hike means to you
States have $70 billion in unclaimed property
rising interest rates Potency is also affected. The average rate paid on a new car loan at the end of 2022 was 6.5%, Edmunds data show. For used cars, the average was 10%. A year earlier, these rates were 4.1% and 7.4%, respectively.
Loan Defaults Can Hurt Your Credit Score
While the auto loan delinquency rate is on the rise, according to Cox, the default rate is not. Entering default — when your lender determines you’re not going to make payments, usually sometime after 90 days past due — can translate into repossessing your car.
Yet being too late with a payment has a negative impact on your financial life, and it can be long-lasting.
“If you’re 30 days late, it affects your credit score,” said Brian Moody, executive editor of Kelley Blue Book.
This usually happens when lenders report late payments to the credit-reporting firm Equifax, experian And transunion,
Also, you should be aware of this as your payment history is the most influential factor in your payment history credit score — it’s usually 35% of it — you can see 100 point drop Due to a 30-day delay in payments, according to NerdWallet. The longer the loan goes unpaid, the bigger the impact on your score, and the delinquency can remain on your credit report for up to seven years.
As consumers are commonly aware, the lower your score, the higher interest rates you are likely to pay on new loans or credits you get. In addition, a bad score or bad credit history may cost you higher premiums on auto or home owner’s insurance and affect your affordability. Rent Get an apartment or even a job. Employers can’t see your score, but they can check your report,
What To Do If You Are Struggling With Auto Loan Bills
For car owners who are convinced that they are driving crime, it is important to try to stop the problem from snowballing.
Moody said, “If you think it’s coming, stay on top of it.” “Do nothing. It won’t get better on its own.”
Experts say that if you’re struggling to stick to a budget well, it’s at least potentially fixable. In that case, take a look at how you’re spending the money.
“Take a look at your total expenses for the last few months,” says Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union. “You’d be surprised how much the average person spends each month without knowing it.”
However, if the payments just aren’t manageable, the first thing you should do is get your lender in the loop.
“If a consumer is struggling to make their car payments, or anticipates challenges ahead, they should reach out to their financial institution as soon as possible,” Pendergast said.
The sooner your bank or credit union is made aware, the easier it will be to come up with possible solutions.
Joe Pendergast
Vice President of Consumer Lending for Navy Federal Credit Union
“The sooner your bank or credit union is made aware, the easier it will be to come up with a possible solution,” he said.
While options vary from lender to lender, you may be able to get a deferment—that is, a few months without payments—or a new loan that reduces payments by extending the length. Either way, be aware that this will usually lead to paying more in interest, noted Moody’s. Kelley Blue Book.
However, a postponement will at least give you time to figure out how to best manage your situation, he said.
For example, you might sell your car with the intention of buying one for less – or, if you have other transportation options, perhaps even without it. Just be aware that depending on how much you owe on the loan, the price you get for your car may not fully cover your balance, meaning you still owe the lender Will give money.
There could be a similar value gap if you choose to trade in it. While the trade-in amount has been relatively high Used-Car Values Are Pushing Up, that’s changing. The latest inflation reading showed a decline of 8.8% year-on-year in used car prices.
And if a dealer is willing to give you that amount, which is less than what you owe on the loan, you will have to either pay off the balance or roll it over to your new loan. This so-called negative equity averaged $5,341 in the final quarter of 2022, Edmunds data shows.
“None of these [options] are ideal,” said Moody. “They all fall under the heading ‘Better Than Nothing’.”