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Monthly car loan payments seem to be becoming a problem for an increasing proportion of car owners.
While borrowers who are more than 60 days late on their payments make up a tiny fraction of all outstanding auto loans — 1.84% — their ranks are growing, according to a recent report by Cox Automotive. The share was 26.7% higher in December compared to the same month last year and is largely concentrated in borrowers with poor credit ratings.
“The danger of paying off a car loan isn’t just about repossessing your car, but also the long-term impact on every other area of your finances,” said Angela Dorsey, certified financial planner, founder of Dorsey Wealth Management in Torrance , California.
High prices, interest rates have led to larger payments
A combination of market factors has pushed up monthly loan payments. And as personal savings have shrunk and persistent inflation has squeezed household budgets, it can become even more difficult to keep up with payments.
According to an estimate by JD Power and LMC Automotive, the median price for a new car hit a record $47,362 in December.
Monthly payments averaged $717 in the fourth quarter, compared to $659 a year earlier, according to Edmunds. The proportion of buyers who accepted monthly payments of $1,000 or more reached 15.7%, compared to 10.5% a year earlier. In the fourth quarter of 2020, just 6% of borrowers had monthly car payments that large.
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Rising interest rates have also impacted affordability. The average interest rate on a new car loan was 6.5% at the end of 2022, Edmunds data shows. For used cars, the average was 10%. A year earlier, these rates were 4.1% and 7.4%, respectively.
Loan defaults can damage your credit score
While the default rate on auto loans is getting higher, according to Cox, the default rate is not. If you default – when your lender determines you won’t pay, usually some time after 90 days of no payments – it could result in your car being repossessed.
However, even late payment has a negative impact on your financial life and can be long-lasting.
“If you’re 30 days late, it affects your credit score,” said Brian Moody, editor-in-chief of Kelley Blue Book.
In this case, lenders typically report the late payment to the credit reporting agencies Equifax, experiential And TransUnion.
You should also be aware that since your payment history is the most influential factor in your credit score – it typically accounts for 35% of it – you could see a drop of 100 points because you are 30 days late on a payment, according to NerdWallet. The longer the loan goes unpaid, the bigger the hit to your score, and this delinquency can linger on your credit report for up to seven years.
As consumers generally know, the lower your score, the more likely you are to pay higher interest rates on new loans or credit. In addition, a bad score or credit rating can make you pay higher premiums for car or home insurance and affect your ability to rent an apartment or even find a job. Employers can’t see your score, but they can review your report.
What to do when struggling with car loan bills
For car owners who are fairly certain they are heading towards crime, it is important to try to prevent the problem from snowballing.
“If you sense this coming, stay tuned,” Moody said. “Do nothing. It won’t get better on its own.”
If you’re struggling to keep up because you don’t have a good budget, it’s at least potentially fixable, experts say. In this case, you should take a good look at how you spend money.
“Look at your spending totals over the past few months,” said Joe Pendergast, vice president of consumer credit at Navy Federal Credit Union. “You’d be amazed at how much the average person spends each month without realizing 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 having trouble making their car payments or anticipates upcoming challenges, they should contact their financial institution as soon as possible,” Pendergast said.
The sooner your bank or credit union is made aware of this, the easier it will be to identify possible solutions.
Joe Pendergast
Vice President of Consumer Credit at Navy Federal Credit Union
“The sooner your bank or credit union is made aware of this, the easier it is to identify possible solutions,” he said.
While options vary from lender to lender, you may be able to get a deferral — meaning a few months without payment — or a new loan that lowers payments by extending the duration. In any case, be aware that this would generally result in higher interest payments, noted Moody of Kelley Blue Book.
However, delaying it would at least give you time to figure out how best to manage your situation, he said.
For example, you could sell your car to buy a cheaper one—or maybe even give up one if you have other transportation options. 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, which would mean you would still owe the lender money.
There can be a similar gap in value if you choose to trade in. While trade-in amounts have been relatively high due to increased used car values, this is changing. The latest inflation readings showed an 8.8% year-on-year decline in used car prices.
And if the amount a merchant is willing to give you is less than your loan debt, you must either pay back the balance or put it into your new loan. That so-called negative equity averaged $5,341 in the last quarter of 2022, Edmunds data shows.
“None of these [options] are ideal,” said Moody. “They’re all under the heading ‘Better than nothing.'”
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