Although it’s been reported that the economy is strong at the moment with low unemployment rates, a new report indicates that many Americans are struggling to pay their bills. The Federal Reserve Bank of New York reported Tuesday (Feb. 12) that a record 7 million Americans are 90 days or more behind on their car payments, which is even more than during the financial crisis in the late 2000s. Naturally, economists have indicated this as a red flag, as the “substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market.”
The report notes the necessity of operating vehicles as it pertains to getting to and from work, leading Michael Taiano, a senior director at Fitch Ratings, to suggest “your car loan is your No. 1 priority in terms of payment, if you don’t have a car, you can’t get back and forth to work in a lot of areas of the country. A car is usually a higher-priority payment than a home mortgage or rent.”
Meanwhile, the New York Fed notes that there are over a million more “troubled borrowers” today than there were in 2010, a time when unemployment hit 10 percent and the auto loan delinquency rate had peaked. In comparison, the unemployment rate is said to be at 4% today while job openings are supposedly at an all-time high.
The report notes that most of those behind on their bills have low credit scores and are under the age of 30, while adding that traditional banks and credit unions have much smaller default rates than “auto finance” companies on the car lot. The data seems to reflect that as well, as fewer than 1 percent of auto loans issued by credit unions are 90 days or more late, compared with 6.5 percent of loans issued by auto finance companies.
“The No. 1 piece of advice I have is to not get your financing from a car dealership,” said Christopher Peterson, a former special adviser to the Consumer Financial Protection Bureau. “Shop separately for the vehicle and the financing. Go to a credit union or community bank to get a low-cost loan.”
Although these reports are certainly a red flag for the economy, experts believe it’s unlikely that the entire financial system will shut down as it did during the recession, as the total auto loan market is just over $1 trillion compared to the home mortgage market that’s valued at $9 trillion.