Coping With Bad Auto Loans

Record numbers of auto loans are in serious delinquency, creating problems for current and future borrowers (especially those with subprime credit). Here's how to cope if you're at risk.
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According to recent data, more Americans than ever are struggling to keep up with their auto loan payments. That’s bad news for the economy, but more specifically it’s bad news for those borrowers with unmanageable loans. Furthermore, it is bad news for people who haven’t even applied for their auto loans yet.

According to the Federal Reserve Bank of New York, the number of auto loans in serious delinquency is at an all-time high. There are now over 7 million Americans with auto loans at least 90 days overdue, and the problem is rapidly getting worse. Auto loans are slipping into a state of serious delinquency at a pace that is 60 percent faster than it was just six years ago.

Again, as serious a problem as this is for the economy at large, this is more than just big-picture data. It seriously impacts individual lives. The automobile is a classic American symbol of freedom and independence. Less romantically, having access to a vehicle can greatly affect a person’s ability to earn a living.

The high number of auto loans in serious delinquency affects not only those who already have loans, but also those who plan to apply for one in the months ahead. Traditionally, high delinquency rates lead to tighter loan standards and higher interest rates as lenders seek to protect themselves from bad loans. So, what follows is some advice for people already struggling with their loans and for people planning to apply for one.

Struggling to make auto loan payments? Here’s what to do

If your auto loan is already behind — or you’re in danger of falling behind — here are some actions to consider:

  1. Prioritize your debt
    If you are struggling to pay your auto loan, chances are you are having trouble with other debts as well. While you should try to keep current on all payments, if it comes down to a choice of which payment to miss, you have to prioritize. If you depend on your car to get to work or for other essential activities, then there is probably no greater financial priority than meeting your car payments except for your residence.
  2. Start a carpool
    If you are commuting to work, see if you can start a carpool where your riders share travel expenses. That might be a good deal for them while providing you with extra cash to help meet your car payments.
  3. Contact your lender
    Don’t hide from the problem. Work with the lender to see if payment terms can be adjusted to make them more manageable.
  4. Consider selling your car to pay off the loan
    Compare the value of the car with the balance remaining on the loan. If you could sell the car for enough to pay off the loan, this is a more desirable way to lose the car than to have it repossessed. There might even be enough left over to trade down to a cheaper car.

If you are planning to apply for an auto loan…

If you are planning to apply for a car loan, you may face a tougher lending environment and higher interest rates as lenders try to compensate for bad loans. Here are some things you can do to improve your chances in that environment:

  1. Maintain good credit
    Auto loans in serious delinquency are barely a blip for people with good credit; but for people with subprime credit (credit scores below 620), loans are slipping into serious delinquency at a rate of 8 percent a year. That means that new loan applicants with subprime credit will face tougher approval standards and higher interest rates.
  2. Save longer for a bigger down payment
    Beefing up your savings account could help you qualify for a loan and earn a better interest rate. It could also make your subsequent monthly payments more affordable.
  3. Don’t over-buy your next car
    Consider the number of auto loans in serious delinquency as a cautionary tale. If you stretch your budget to the breaking point to buy a more expensive car, you leave yourself no flexibility if you have a financial setback later on.
  4. Compare specific loan terms
    Loan rates differ greatly depending on whether you have good credit or subprime credit, and the spread in rates is likely to widen due to so many poorly performing subprime loans. While lenders tend to advertise their best rates, you should compare quotes that apply to your credit standing and financial means.

Loan problems are a tremendous hardship for the borrowers involved, but they also have ripple effects that impact other borrowers and the economy as a whole. Thinking through what could go wrong with a loan is one way to help you remember to borrow responsibly.

More resources on reducing expenses:

The cost of sloppy banking habits

Can you change a spouse’s spending habits?

Our 2018 survey shows higher checking account fees can be avoided

Compare checking accounts: 7 tips for finding the best checking account

Should you be a checking-account hoarder?

More resources on saving:

Learn how much to save to meet your goal: savings goal calculator

Compare savings accounts, money market accounts and CDs

Learn about banks that consistently offer the highest interest rates: America’s Best Rates survey

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).