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Car loans now top student loans
Five years ago, only 5% of buyers paid more than $1,000 a month on their auto loans, a sum that seemed extravagant, even irresponsible. Auto debt is extremely normalized in the U.S., with 80% of Americans financing their new car purchases, and with interest rates way up, the effective price paid is much higher than even the elevated sticker prices suggest.
Delinquencies and repossessions are skyrocketing. In some states, a full 9% of borrowers have missed at least two consecutive payments, and three million vehicles are now repossessed a year. Americans now owe more in auto loans than student loans, even with tuition approaching $100,000 a year at some colleges.
How do longer loans lower monthly payments?
Spreading the same balance over more months shrinks each payment, so lenders have offered terms of 72 and even 84 months. Interest accrues for longer on a longer loan, which raises the total paid. A car can lose value faster than the balance falls, leaving an owner owing more than the car is worth, a situation called negative equity. Experian's reports on the auto finance market have tracked a growing share of new loans with terms longer than 72 months.
Why are cars repossessed faster than homes?
An auto loan is secured by the vehicle, and the lender holds a lien on its title. A car loses value quickly, so the collateral shrinks while a borrower falls behind. Foreclosing on a house is a court process in many states and can take months. In most states, a lender can repossess a car without going to court.
How do lenders set car loan rates?
Lenders sort borrowers into tiers by credit score, and the credit bureau Experian uses the categories super prime, prime, near prime, subprime, and deep subprime. Each step down the ladder carries a higher rate because the lender expects more defaults. Used cars generally carry higher rates than new ones, since the collateral is older and worth less. Benchmark interest rates set by the Federal Reserve move the base on which those tiers are priced.
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