Reasons Of Rising Car Loan Defaults Even In A Great Economy
Simply having a great and a strong economy does not mean that the loan defaults will be less or negligible. Take America for instance. It is considered to have the strongest economy but still loan defaults, especially auto loan defaults amounts to trillions!
Therefore, the natural question that may arise is what are the reasons that even a country with such a great economy has such a high rate of auto loan defaults? Well, here are a few significant reasons for such high amount of auto loan defaults.
- The fresh predatory lending practices have made it much easier for the lowincome buyers to borrow money to get behind the wheel but it has also made it harder for them to escape the debt trap.
- Access to a car is virtually a necessity in order to live and work in most parts of the US. This has kept the demand of new as well as used cars perpetually high.
- Most of the people borrow money more than they can afford to buy a car and are found to be drowning in debt making them look for debt relief at NationaldebtRelief.com or any other site for that matter.
Well, it is true that Jobs, shops, daycare, doctors, and entertainment are often at unreachable distances in America by transit. It is almost inaccessible by foot and even on a bike. It is also true that those people who own a car have a more stable life and a healthier bank account, research shows.
Auto financing landscape
The facts and findings of the new reports paint a very sorry and an increasingly worrying picture of the auto financing landscape.
- First up, according to new research reports of the Federal Reserve Bank of New York there are about 7 million Americans who have fallen at least 90 days behind their car loan payments. This figure is about a million more than it was in 2009 during the end of the recession.
- Secondly, when it comes to the share of the entire auto loan accounts, the rate of delinquencies are also quite high as the households feel the direst effects of the tanking economy.
- Thirdly, the growth is normally proportionate to the expansion of the auto lending market in general.
It is found in the report that by the summer of 2018, Americans owed an astonishing amount of nearly $1.26 trillion on their car loans. It has ideally risen by 75% when it is compared with the figure of 2009.
Serious financial duress
The growing number of car loan defaulters is a sign of severe financial duress for the households. Experts say it is all due to:
- The fact that cars are so essential for Americans
- The fact that they prioritize paying off the debts traditionally ahead of others
- The badly designed mortgages especially before the Great Recession.
As a result, the Americans started to fall behind their payments on their house first, then on credit card debts and third on their car loans.
Another significant factor the experts point out is that the car being the most important asset to any American, failing by the households to make the payments on such an important asset implies that they are not financially strong enough to maintain their hold on it.
Effects of the economic inequality
This, in turn, seems to point towards another underlying effect that is persistent involving economic inequality. The reasons of such inequality include:
- Too little people are sharing the welfares of an apparently healthy economy in which the rate of unemployment is low and the markets are strong
- Wages of the workers are stagnant while the cost of living in continually rising and
Most of the Americans are still digging their way out of their other existing debts such as personal and student loans.
Predatory financing options
To make the scene even more complicated, there is a host of new auto financing options available in the market.
- While most of these are basically predatory, people still are driven towards them to buy their new or used car and are literally driven into debt road being least able to shoulder the high interest rates of such loans.
- Then there are the high interest subprime loans that are particularly aimed at the purchasers who have a very low income as well as poor credit scores. These types of loans make up for about 26% of all auto loans that were issued in 2016 which is up from 14%issued in 2009.
The US Public Interest Research Group explains in their new paper about the history of this apparently familiar form of lending. This is very much similar to the subprime home loans structurally that crashed the entire economy back in 2008 during the Great Recession.
- The paper shows that there is an increase in the investor demand for the high yield bonds
- This resulted in the loosening of the lending standards for car loans by most of the finance companies and banks instead of strengthening them
- This trend started in 2011 and continued till mid-2016making it easier for people to qualify for these loans
- Few lenders even engaged in questionable lending practices that were reminiscent to those lending practices in mortgage that ended in housing market crash in 2008 and
- Loans were extended to consumers without considering their ability to repay.
Most importantly, most of the lending establishments became lax in finding more borrowers whose loans could be bundled into high risk and high profit securities and sold in the stock market.
Meanwhile, the chip technology has also streamlined the efficiency of the lenders to repossess a car when their payments are past due.
In short, it can be said that the ever rising number of the defaulted auto loans suggests that there is something wrong with the economy and personal vehicles are not the golden tickets always. In fact, for Americans living paycheck to paycheck, there is a catch: If you do not have the money to buy a car, you are sure to struggle to make the payments.