Personal Finance

An explosion in auto debt threatens consumer finances, advocacy group warns

Key Points
  • Data from the Federal Reserve Bank of New York show that 7 million Americans were at least three months behind on their car payments at the end of 2018, which is 1 million more than in 2010.
  • Among subprime borrowers — those with credit scores below 620— the overall delinquency rate stood at 16.3 percent in mid-2018, other data shows. In 2015, that figure was 12.4 percent.
  • The average amount financed for a car is $31,707 and the average loan length is 69.1 months, up from 61 in 2010.

As Americans' appetite for new cars continues unabated, an advocacy group is sounding the alarm over the growing level of auto debt carried by U.S. consumers.

In a report issued Wednesday, U.S. PIRG warns that the continuing rise in auto debt is putting many consumers in a financially vulnerable position, which could worsen during an economic downturn.

The report comes on the heels of data released Tuesday by the Federal Reserve Bank of New York showing that at least 7 million Americans were in serious delinquency on their car loan — 90 or more days behind — at the end of 2018. That's 1 million more than at the end of 2010.

Daniel Acker | Bloomberg | Getty Images

"More and more people are buying too much car for what they can afford," said Ed Mierzwinski, senior director of U.S. PIRG's federal consumer program.

The group's new report delves into the financial implications and policy-related aspects of Americans' reliance on cars. It shows that the aggregate amount of auto debt that consumers carry — roughly $1.27 trillion — is 75 percent more than the amount owed at the end of 2009 (it's 51 percent when adjusted for inflation).

Overall, auto debt accounts for about 9 percent of total U.S. consumer debt, up from 6 percent in late 2011, separate data from the Federal Reserve Bank of Kansas City show. Among subprime borrowers — those with credit scores below 620— the delinquency rate was 16.3 percent in mid-2018. In 2015, that figure was 12.4 percent.

Part of the overall growth in auto debt comes from consumers' shifting preference for larger, more expensive vehicles such as trucks and SUVs instead of sedans or compact cars. The average price of a new vehicle is now about $37,100, compared with $27,573 five years ago, according to auto research firm Edmunds.

For consumers — the bulk of whom finance their purchases — that means higher balances and loans that stretch longer. As of January, the average amount financed was $31,707 and the average loan length had reached 69.1 months, up from 61 in 2010, according to Edmunds.

Rising interest rates also make the cost of borrowing more expensive. The average rate on an auto loan is roughly 6.2 percent, compared with 5 percent a year ago. However, the lower a consumer's credit score, the more they can expect to pay in interest — even in the double digits.

To illustrate the difference that the interest rate makes: If you pay 4 percent on a $30,000 loan over 72 months, you'd pay about $470 a month and end up shelling out close to $3,800 in interest.

By comparison, the same amount financed for the same length of time but at 10 percent interest would result in monthly payments of $555 and interest totaling more than $10,000. And, the longer the loan term, the greater the chance you could reach a point where the amount you still owe on the loan is more than the value of the car itself.

Mierzwinski said the most important way consumers can keep the cost of their purchase down is to secure financing before heading to a dealership. If not, you'll be presented with options that could cost you more in interest, whether through the dealer's own financing arm or another lender that it works with.

Mistakes to avoid while car shopping
Mistakes to avoid while car shopping

"Get preapproved at your credit union or bank," Mierzwinski said.

Additionally, he said, add-ons offered at the dealership during the purchase process will only cost you more and line the pockets of the dealership.

"Avoid things like etching or undercoating or an extended warranty, or other products you don't need," Mierzwinski said.

Additionally, you can explore other options to to reduce your costs, such as considering a used car.

"We're warning people not to buy too much car, not to take out too much of a loan or fall for any of the tricks and traps that dealers use to get you to pay more than you should," Mierzwinski said.

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