Fighting For Fair

America’s Car Payment Crisis

A Record Number of Americans Are Behind On Their Auto Loans. Here’s Who’s Hurting Most.

BY Liz KnuevenMarch 12, 2019

It’s the dirty secret in the narrative of our red-hot economy. While the stock market is doing well and the unemployment rate is relatively low, the simple fact is that not everybody is participating in that success—and it’s a serious problem.

One telling aspect of this is a recent Federal Reserve report that found a record 7 million Americans were more than 90 days behind on their car loan payments at the end of 2018—a figure they claim is higher than even at the worst point of the 2008 economic crisis.

We’ve written before about the multitude of reasons that taking on auto debt is a bad idea—from the approval hassles to their ever-expanding length (which now hovers near six years for new cars). This latest data proves the problem is only getting worse. But why? Is there a reason auto loans continue to be a multi-headed hydra of problems when so many other economic indicators are looking up? The problem comes down to how auto loans contribute to already high levels of household debt—and the trouble is compounded when their inflexible terms are mixed with low wages.

Auto Debt: A Growing Problem

At the end of 1970, Americans owed a comparatively paltry $36 billion in auto loans. Compare that to today’s $1.2 trillion in outstanding auto loans and you can see that this mountain of debt is no mere molehill.

The result of this is pretty terrible for car owners. In fact, Kelley Blue Book reports that the average price of a new car hit an all-time high of $36,000 in 2018, resulting in an unprecedented average car payment of $551 spread out over an average of 69 months.

So as people fork over more than ever before to buy larger and more expensive vehicles, their payments are going up to record levels at the exact same time they’re spreading out those loans over a longer and longer period in an effort to keep those payments somewhat in check.

It doesn’t take a mathematician to see this is a rubber band being stretched further and further to its limits. And a continuing rise in delinquent payments could indicate trouble, experts say.

“No, this doesn't mean recession is coming this week, this month, even this year,” NPR political reporter Danielle Kurtzleben said in a recent interview. “But it does seem to show that amid this seemingly pretty strong economy, there are some soft spots. And that is worrying.”

Auto Loans Outstripping Wages

The sheer size of today’s auto debt—and the high loan payments it’s producing—isn’t even the most worrying aspect of the issue. Turns out, our car loan payments are also vastly outstripping our wages.

Back in 1970, the annual median income was $9,870, according to the US Census Bureau. Meanwhile, the cost of a very typical passenger sedan, a Ford Galaxie, was $3,205—or about 32 percent of Americans’ average annual take-home pay.

In 2017, the Census reported the highest median income ever at $61,372. Despite this, NADA reports that the base model of a Ford Taurus—the spiritual equivalent to the dear, departed Galaxie—ran about $27,345 in 2017, or about 44 percent of that year’s record median annual income.

Couple that with today’s other rising costs like high rent and record levels of student loan debt (a non-issue back in the day) and it’s easy to see how this could be seriously problematic.

Young And Subprime Borrowers Suffer Most

And who’s being hurt the most in all of this? Turns out, it’s primarily young people and subprime borrowers. According to data from the Federal Reserve, there was a sharp uptick of auto loan delinquency among people under 30 between 2014 and 2016, which has yet to come down. In fact, around 4 percent of people aged 18-29 with auto loans are now in serious delinquency, up from a low of 2.3 percent in early 2014.

Delinquent Auto Loans by Age of Borrower

So, what happened?

Auto debt has combined with higher costs of living, and that combination has been compounded by largely stagnant post-college salaries. Add outstanding student loans to this mix and you’re got the makings of a generational crisis.

The problem with car loans is particularly worrisome because most people don’t recognize that they pose the same financial threat as student loans and credit card debt, editor and personal finance analyst J.R. Duren told Fair.

“The average price of a new car plus interest will leave you with roughly the same balance as the average student loan,” Duren said. “There's a widespread fear of student loans, so there's a lot of hesitancy for people who are considering them. The same cannot be said about car loans.”

Of course, the young aren’t alone in experiencing growing rates of auto loan delinquencies. Around 8 percent of consumers with credit scores below 620 had auto loan accounts become delinquent in 2018’s fourth quarter—far more than in any other credit category.

Bill Westrom, co-founder of Truth in Equity and author of Master Your Debt, said it’s part of a troubling trend that only seems to be getting worse.

“The financial balance of the conventional model of banking and borrowing is proving itself to be extremely out of balance,” Westrom said.

Auto Loans by Origins of Credit Score

The Economic Outlook

The good news is that experts are speculating that this surge in delinquent auto loans is not likely to spur another major economic downturn the way subprime mortgage lending did in 2008. After all, auto loan debt accounts for only 9 percent of American consumer debt, according to the Federal Reserve Bank of Kansas City. However, that’s up from 6 percent in the third quarter of 2011, illustrating that the problem is worsening.

Todd Christensen, a financial counselor and founder of the non-profit Money Fit, said he has noticed a troubling trend among bankruptcy filers: that a large auto loan payment is often a factor in their money troubles.

“One of the common denominators among most people getting ready to file for bankruptcy is a large car payment,” Christensen said.

Christensen said these loans usually equal 15 to 20 percent of the bankrupted person’s income, but sometimes stand at 50 percent.

Westrom said fixing the problem will require people adopting a different way to get their cars than the traditional auto loan.

“If you want better financial results you have to operate a better model,” Westrom said.

[No loan. No debt. No worries](

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