Chasing that new car smell has led some car buyers to drive off with more than they bargained for.
Low interest rates and low unemployment, along with loosened lending standards and greater new car sales incentives, have contributed to a boom in car leasing and auto financing.
Americans are now spending more on their cars, but less out of pocket, and taking on more debt than they can afford.
That, along with increased subprime lending — which is more profitable because lenders can charge much higher interest rates — has led to a recent increase in the number of drivers falling behind on their car loans, according to the Federal Reserve Bank of New York.
Auto loan delinquencies rose more than any other category in last year's fourth quarter, according to the most recent data from the American Bankers Association. The ABA's Consumer Credit Delinquency Bulletin tracks 11 loan categories, including home equity lines of credit, auto loans and credit cards. The report defines a delinquency as a payment that's 30 days or more overdue.
Leasing or loans now finance nearly 90 percent of retail car sales in the U.S., according to global asset manager Standard Life Investments. Altogether, more than 33 percent of American households are making car payments, according to a separate Pew Charitable Trusts study, with over $1 trillion in auto loans now outstanding.
Still, there is little reason for alarm, some experts say.
For starters, overall delinquency rates — including credit cards, auto loans and mortgages — are at very low levels by historical standards. "Even with recent increases, auto delinquencies have remained remarkably low for the last five years amid booming car sales," James Chessen, ABA's chief economist, said in a statement.
In addition, car loans make up only a small portion of total household debt, said Jeremy Lawson, Standard Life Investments' chief economist. (Less than 10 percent, in fact, according to the Federal Reserve Bank of New York).
Household debt by the numbers
| | Total owed by average U.S. household carrying this type of debt | Total debt owed by U.S. consumers |
|---|---|---|
| Credit cards | $16,061 | $747 billion |
| Mortgages | $172,806 | $8.35 trillion |
| Auto loans | $28,535 | $1.14 trillion |
| Student loans | $49,042 | $1.28 trillion |
| Any type of debt | $132,529 | $12.35 trillion |
Source: Source: NerdWallet
And, other types of delinquencies have not been trending higher at the same pace, Lawson said. At the moment, "the problem is isolated to the auto sector."
For car buyers lured by summer sales, Greg McBride, senior analyst for Bankrate.com, recommends researching financing in advance to know what you can afford before you even drive onto a lot.
"When that new car smell disappears, there is still a monthly payment that needs to be made," Chessen said. "Thoughtful and realistic budgeting over the life of the loan is the best protection against becoming overextended."