Credit Crunch For Auto Loans
(The Auto Industry Will Be The Next Crisis, Kipp)
By David Cho and Nancy Trejos
The Washington Post
Reina Bolanos got a loan for her used Honda Odyssey in 2006 on what appeared to be favorable terms: $16,000 without a down payment.
Though the 8 percent rate was high, Bank of America offered to spread the loan over six years to keep the monthly payments down.
But the secretary from Silver Spring, Md., found that raising her young children cost more than she had expected, and she now worries about losing the car after missing her last two payments.
A growing number of Americans are buckling under the weight of debt as the troubles that started among homeowners with subprime mortgages last year spread to other consumers who rely on credit. Auto loan borrowers are having an especially hard time. The number of people more than 60 days late on their car payments has spiked to a 10-year high, according to Fitch Ratings.
Similar problems are brewing for credit card holders. Card balances written off as uncollectible by banks have jumped 24 percent, and late payments are up 16 percent from a year ago.
Like the mortgage market, consumer credit boomed in recent years as lending standards loosened.
Unorthodox auto loans lured consumers to buy cars they otherwise could not afford. Credit cards teased holders with introductory rates that soared after a few months. Now, more people are struggling to keep up with their bills under the strain of growing job losses and an economic downturn.
Consumers borrow more money today than at any point in history, and they are increasingly using credit to pay for nearly everything, from cars to groceries to electricity.
Consumer debt reached a record $2.55 trillion in December, nearly double from a decade ago, according to the Federal Reserve. Some economists say Americans are simply paying the price of their addiction to debt and are now more vulnerable than ever to credit downturns.
Behind the rising defaults is a tale of two Americas. Those with good credit will almost certainly see lower rates on cars and credit cards as the Fed continues to cut rates this year. But those with bad credit are facing rising rates and being forced to put more money down on cars. Some may not be able to get a credit card or auto loan as banks, spooked by the mortgage mess, have been reassessing the risk of making loans.
“It’s going to be much more difficult for those people who are already in credit distress than it is for those of us who are fortunate and have full-time jobs,” said Tony Cherin, a finance professor at San Diego State University.
But others worry that even those with good credit will share in the pain. The financial woes that started among homeowners with questionable credit histories — the “subprime” borrowers — have already sparked a downturn in the broader housing market.
“It’s not only people who are stuck with the subprime mortgages. It’s your average American,” said Todd Cook, president of Debt.com, which refers financially stressed people to firms that can help them. “It started with mortgages, but it’s spilling over. If it’s not their homes, it’s their credit cards. If it’s not their credit cards, it’s their autos.”
Car loan holders are not only missing their payments. They’re increasingly losing their vehicles.
The number of repossessions soared last year by 10 percent and is expected to rise by the same amount this year, said Thomas Webb, chief economist for Manheim, a global car auction firm.
Repo lots are getting full, he said, adding that the troubles mean “banks will be looking for more money down, which means most consumers will probably have to buy a lower-priced vehicle.”
That would have consequences for the auto industry. Lehman Brothers said in December that it expected U.S. auto sales to drop this year because many consumers will find it tougher to get auto loans. The bank said in its report that General Motors, Ford and Chrysler will feel the worst of the downturn because customers with questionable credit account for a higher percentage of their sales than those of European and Asian brands.
Delinquencies among borrowers with poor credit exceeded 4 percent last month for the first time since 1997. For borrowers with good credit, the rate hit 0.8 percent, also the highest in a decade.
Credit card companies are also seeing a rise in delinquencies, and while they are not near historically high levels, they are following a bad trend, industry analysts said.
According to Moody’s latest report, the number of people more than 30 days late on their credit card payments in November rose from 3.89 percent a year ago to 4.28 percent, the highest it has been since March 2005. It was the fifth consecutive month-to-month increase.
Part of the reason so many people are struggling with credit card debt now is that they can no longer tap home equity loans.
Now that housing prices have dropped, homeowners are less able to extract cash from their properties. Homeowners cashed out only $38 billion from refinances in the last quarter of 2007, the lowest in more than three years and nearly half as much as in the same period in 2006.
“People can’t use their home as a piggy bank,” said Travis Plunkett, legislative director for the Consumer Federation of America. “They can’t rely on home equity with regard to spending, so they’re increasing credit card spending because it’s the last place they can go if they want to have access to credit.”
AI
