mmarshall

For a number of reasons, I'm generally not a fan of the Washington Post, but occasionally, they print something that, in my view, is credible. Despite a very low unemployment rate and long-term payments for as long as 6-7 years (72-84 months), designed, of course, to keep monthly payments a slow as possible, many car owners are still having a difficult time paying that monthly note. Car-loan default appears concentrated in the below-age-30 group, the ones that are often also having trouble paying off student-loans.

While the article does appears credible, one thing it doesn't seem to go into much is simply biting off more car than one can chew. A number of young people, for example, lust after a new BMW 3-series (maybe even an M3) or Subaru STi....they just have to have that new performance car while, in reality, they are operating on a Toyota Corolla budget. But they can't (or won't) buy something in that class because they think their friends will laugh at them.

I got my first new car when I was 23 years old....about a year or so after I had started my Federal career. I wasn't making that much at first, but what I did make was secure, and I knew I had a good potential career, with job security and benefits. Before that, for several years, I had driven (used) big American cars (I absolutely loved my big Buick in college)...but knew I couldn't afford one brand-new. We were also in the gas-crises of the 1970s at the time. So, I played it safe, and for my first new set of wheels, got basically a brand-new, updated version of the Plymouth compact I had learned to drive on in the late 60s. Also, by doing that, I was able to write a check for it outright, and avoid debt in the first place. That car lasted me several relatively trouble-free years...when I switched to FWD products for better winter traction.





https://www.washingtonpost.com/busin...-flag-economy/

A record 7 million Americans are 3 months behind on their car payments, a red flag for the economy

By Heather Long

February 12 at 1:01 PMA record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis.

Economists warn that this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.

“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,” economists at the New York Fed wrote in a blog post.

A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is usually a sign of significant duress among low-income and working-class Americans.

[[url=https://www.washingtonpost.com/business/economy/the-surprising-return-of-the-repo-man/2018/05/15/26fcd30e-4d5a-11e8-af46-b1d6dc0d9bfe_story.html?utm_term=.dd4690b2d3d9]'Repo men' are doing better than ever]

“Your car loan is your No. 1 priority in terms of payment,” said Michael Taiano, a senior director at Fitch Ratings. “If you don’t have a car, you can’t get back and forth to work in a lot of areas of the country. A car is usually a higher-priority payment than a home mortgage or rent.”

People who are three months or more behind on their car payments often lose their vehicle, making it even more difficult to get to work, the doctor’s office or other critical places.

The New York Fed said that there were over a million more “troubled borrowers” at the end of 2018 than there were in 2010, when unemployment hit 10 percent and the auto loan delinquency rate peaked. Today, unemployment is 4 percentand job openings are at an all-time high, yet a significant number of people cannot pay their car loan.

Most of the people who are behind on their bills have low credit scores and are under age 30, suggesting young people are having a difficult time paying for their cars and their student loans at the same time.

How to Adult: How to buy a caBuying a car can be a daunting task if you don't know where to start. We'll help guide you through the process. (The Washington Post)

Auto loans surged in the past several years as car sales skyrocketed, hitting a record high in 2016 of 17.5 million vehicles sold in the United States. Overall, many borrowers have strong credit scores and repay their loans on time, but defaults have been high among “subprime” borrowers with credit scores under 620 on an 800-point scale.

The share of auto loan borrowers who were three months behind on their payments peaked at 5.3 percent in late 2010. The share is slightly lower now — 4.5 percent — because the total number of borrowers has risen so much in the past several years. Still, economists are concerned because the number of people impacted is far greater now and the rate has been climbing steadily since 2016 even as more people found employment.

Experts warn Americans to be careful where they get their auto loan. Traditional banks and credit unions have much smaller default rates than “auto finance” companies such as the “buy here, pay here” places on some car lots.


Fewer than 1 percent of auto loans issued by credit unions are 90 days or more late, compared with 6.5 percent of loans issued by auto finance companies.

“The No. 1 piece of advice I have is to not get your financing from a car dealership,” said Christopher Peterson, a law professor at the University of Utah and former special adviser to the Consumer Financial Protection Bureau. “Shop separately for the vehicle and the financing. Go to a credit union or community bank to get a low-cost loan.”


Rates can vary substantially depending on a borrower’s credit score and where they obtain a loan. A “prime” borrower with a credit score in the range of 661 to 780 can get an auto loan rate of about 4.5 to 6 percent, according to NerdWallet. In contrast, a subprime borrower is typically looking at rates between 14.5 and 20 percent.

After the financial crisis, the government placed heavy restrictions on mortgages to make it harder to take out a home loan unless someone could clearly afford to make the monthly payments. But experts warn that there are far fewer restrictions on auto loans, meaning a consumer has to be savvier about what they are doing when they take out a loan.

"Predatory lending practices and a lack of real transportation options leave many households trapped in debt with few ways out,” said Faye Park, president of the U.S. Public Interest Research Group, which advocates for consumer protections.

Repossessing a car is also a quick process thanks to technology and the laws in many states. Some cars are installed with devices that prevent the car from turning on if someone misses a payment and it has become easier to geo-locate a car to tow it away.

“It’s a lot easier to repossess a vehicle than to foreclose on a home,” Taiano said.

He noted that non-prime and subprime auto loans increased from 28 percent of the market in 2009 to 39 percent in 2015, a reminder of how aggressively lenders went after borrowers who were on the margin of being able to pay. More lenders are giving people six or seven years to repay now vs. four of five years in the past, according to Experian, another tactic to try to make loans look affordable that might not otherwise be.

While defaults on auto loans are a red flag, they are unlikely to take down the entire financial system as mortgages did in the lead-up to the 2008-2009 financial crisis. The total auto loan market is just over $1 trillion, far smaller than the $9 trillion home mortgage market.

The amount of money people borrow to buy a car is also much smaller — typically under $35,000 — vs. a home loan, where people often borrow several hundred thousand dollars.

Toys4RJill

mjeds

I 100% agree with this assessment. I work in an industry that gives a lot of fresh out of college employees their first taste at a "decent" paying job/career. my company specifically hires a lot of fresh faced inexperienced college grads, and starting pay in most Corp positions is high $50K - low $60K.

In my dept. (IT) it is closer to low $70K for some positions, but these youngsters are driving M4s, Tesla's Model 3 and Model X, C-class and E-class coupes, Etc.. 2 in my dept. I know their salaries, and they both have M4s which OTD cost 1.5 times what they make annually. Their leases are $1,200+ a month for the car, at their age (both under 25) their insurance has to be $300-$400 a month as well. While neither pay rent, they both live with their parents, it truly makes no sense to me, both constantly complain they are always broke but fail to understand why, their complaint is always they don't make enough money, not that they over spend what they do make.

I was taught by my father that you should never buy a car that costs more than your net take home for 6 months, nor a home that costs more than your net take home for 5 years. Staying within those guidelines I have always been able to save 20% or more of my paycheck every week.

the problem as I see it, is their parents never learned basic budgeting and how to manage personal finances, therefore they were never learned it. and it extends beyond car, I work for one of the largest retail clothing companies in the country, and it amazes me how much some of these kids spend on clothes.

We have employee sales of over stock and samples 4 times a year, every item is $1, I get my teen daughter 40 - 50 outfits for $40-$50 and let her pick and choose what she thinks is cool, and we donate the rest, most of the younger employees shun these employee sales and prefer to pay retail (minus their discount), as if buying the same item at $1 somehow diminishes it's appeal.

I hear the statement a lot, "I would rather buy it in the store than at the employee sale"

for me, if I can get a $50 pair of jeans for $1, or a $30 shirt for $1, guess where I am shopping..

Toys4RJill

When you feel good about a brand such as NIKE, Apple, or Levi's or whatever, you don't have a problem paying the high prices. Its because buying these things at the cost they cost makes you feel good. .

mmarshall

Apple, though, gives you the quality you pay for. My old i-Phone4 was well-worth what it cost (it lasted a good 8-9 years, built like a tank)......the new i-Phone 7 I recently bought doesn't feel quite as durable, but, of course, operates a heck of lot faster.

I'm sure NIKE and Levi's also is good quality, but I find that, at the right stores, I can also find decent (or at least acceptable) quality with lower-priced brands. And, at J.C. Penny's, they sell NIKE and Levi's Big & Tall stuff at reasonable (and sometimes discount) prices. Remember the thread I did about J.C. Penny's, saying I hope they stay in business?

Thanks. We don't get many threads on the subject of car-loans, but it seems to be an increasingly significant issue in the economy.

mjeds

Freds430

If you are familiar with Dave Ramsey (syndicated radio talk show host) who is a multi multi millionaire and pretty smart guy, he says the total value of all your vehicles—things with a motor in them—should not be more than half of your annual income. He also states unless you are a millionaire you pay cash only for a car. To confirm this 90% of his callers in financial stress are upside down on their vehicles. Never get a loan on a depreciating asset.

The average car loan payment is $550 and term is 66 months. If a 25 year old decided to invest that same amount over the same time period in the S&P Index Fund then left it alone growing in the same fund at 65 years old they would have over $2,000,000. The power of compounding. That car would be a recycled park bench 40 years later.

Johnhav430

I got the iPhone Xs before Thanksgiving because of the $249 offer from Verizon wireless (relatives got Xs' for free on the same promotion, but they had to come from AT&T wireless). I laugh out loud, A12 bionic, personally iOS is imho not good compared to android (not starting a debate, it's good for kids and elderly per a friend in IT). app for app it seems android is intuitive, iOS is not. I think of Apple as being like BMW. The brand alone is worth far more than anything, there is a significant $ value on the brand, forgetting about the products themselves. BMW gave out loaner cars to anyone who wanted one during Takata, for months, years. Who else would do that to protect their brand name? I asked for a copy of my invoice for the 328xi that I had for 4 1/2 mos., and it was over $9k. I said clearly this is not what BMW is paying, and was told, yes it is. $9x/day. And the process had more holes than swiss cheese, with people who didn't even own BMWs anymore getting cars. I can tell you who did not offer loaners--Mercedes Benz, Audi, Toyota, for starters. Honda, did, but not for years or months, days and weeks.

My brother just got a Ford Raptor, and he said, he got 3% and it was a great deal. I thought, ye gads, 3%? My mind is still saying I'd do 1.49% but not 3%. What is missing today, when compared to my grandparents' times, is saying no. No, I don't need that car and I don't want to pay the high price and the interest, imho. I bought a 2006 Lexus to avoid buying a 2016 M2 or 2016 Golf R, and the payment associated. I lost out big time on driving fun, but my pocketbook is happy and I won't die.

Again, brand names. I wore Nike shorts to the gym today, but here's a confession--my wife got them at Kohl's on clearance--they were $12 and she had a 30% coupon. Levis? I have 3 pairs of 559's where the rear right belt loop has torn off when the jeans are not worn out. I think it's a quality control issue.

edit along the lines of finance and what's going on in the economy:

For 2018, I got a tax hike. I know why in my mind. It's just surprising to me that it's on the news that people are just realizing this. There is a great degree of the general public who are really out of touch with things, finances being one. My thoeory is it's not like before where a person leaves their assets to charity and heirs. I think it's a zero sum game...

p.s. here's dummying it down. On another forum, a member who drives a dump truck stated, I got $3,500 more through my net pay, but my refund was $2,500 smaller. So he got a $1,000 net gain. There are other personal situations (affecting many) where nothing except the tax rate went down, the net net is tax obligation went up. So the tax cut is referring to only the rate, not the obligation. So for people like me, tax hike.

tex2670

Low unemployment is only one narrow metric. There's a reason for the push to raise the minimum wage; if you are employed, but you are making $8.00/hr, you are certainly not in a place of financial stability. And too many people just have no clue of fiscal responsibility or budgeting. Unethical car sales people push selling a monthly payment, instead of the overall price, and people buy into that payment, looking at it in a vacuum, without plugging it into an overall budget of money that goes in and out on a monthly basis.

It's not just cars. When I shopped for a house almost 20 years ago, I sat in the mortgage representative's office of our realtor. They ran our income, etc, and came up with a price of a house we could "afford" which was about 2x as much my projection. They had me spending every available $1 I had towards a home. Because, you know, "Houses always increase in value, and your income will keep going up." I ignored this advice, but many people didn't. Then 2008 happened. I'm sure @SW17LS has some good war stories about that.

Johnhav430

I remember that because I was single. I have a friend in Greenwich, CT, who never married. Back in 2002, I remember him saying, that being single, he has a problem getting the house he really wants, which was $800k at the time. He limited himself to $500k, which for where he lives, was not a lot at all. At the same time, he had to not only look at that number, but look at what he was putting down, which was over half of that. so he concluded he could get the house for $500k. In 2002 my salary was relatively small imho, yet, mortgage brokers stated I could safely borrow 350k. Luckily I didn't bite and did about 1/2 of that an it will be paid off in 3 years. My buddy in FLA said honestly paying off a mortgage is not really most peoples' goal these days, because by the time the kids are done with HS, they can downsize and move to a cheaper location. They lived in a 600k house in Tampa, huge. The girls' room and bathroom is almost as big as our entire 2nd floor. It's a lifestyle.

I used to love Suze Orman and hate Dave Ramsay. Then I thought, if you wanted to get into shape, would you want a trainer who was nice to you, or blunt while making sense?

Two people whom I think helped me get the mortgage down. One was a coworker in her 50's at the time telling me to put any extra money to the principal. The second was a friend of my wife who told me about a first lien position home equity, which allowed refinancing with zero fees since no title insurance exists. This way as rates dropped, the principal could be refinanced. Rate lower than a 30, higher than a 15, and amortized over 10. But it truly was zero fees except for the county records fee. Zero fees is different from zero out of pocket, which the banker man uses to push refis.

And today with mortgage interest severely capped, it really doesn't make sense to borrow very much. Canadians probably say welcome to what we have always known.

Wandl

This is a combination of 3 factors (my 2 cents, of course)
1) Uneducated buyers who don't have financial discipline
2) Dealers who dangle payments as the selling point (even over 72, 84 or sometimes 96 months) to make the improbable possible
3) Lenders who bankroll this whole thing

One of the country's top 3 subprime auto lender was my customer for about a year (I'm in software sales) and the stuff that goes on behind the scenes is amazing; they invest in so much analytics and have so much data they can largely PREDICT when a delinquency is about to happen. Credit Acceptance Corp stated they repo 35% of the cars they finance. However, these lenders need to refill the leaky bucket of customers who pay them; so lax underwriting along with incentives to dealerships (~30-40% of my profits when I was GM of a used car dealership came from F&I - finance and insurance). In fact, the FDIC came out with a statistic that in Q4 of 2016 (or 2015) auto lenders approved 95.1% of the loan applications submitted. While it has gone down since then, I can't imagine a world where 95% of customers are approved for car loans; in my day in the early 2000s it was closer to 60%.

Is this a sign of larger things to come? Can't ignore it, I don't think this is 2008 mortgage crisis all over again but a shocking percentage of car owners are delinquent (30 days plus) and it isn't about to get any better unfortunately.

4TehNguyen

iTrader: (1)

this is what happens when you loan out to sub prime

jrmckinley

Interesting stat from the article: "The New York Fed said that there were over a million more 'troubled borrowers' at the end of 2018 than there were in 2010, when unemployment hit 10 percent and the auto loan delinquency rate peaked." Two sentences later it states most of the folks with delinquent loans are under 30.

This seems to directly contradict other things we read about milennials being focused on experience rather than material items (they'd rather travel than buy "stuff"). So...the "kids" are either buying higher-end cars they can't afford, or they're rolling in negative equity from prior car(s). The double-whammy is when they do both.

I also think we are much more focused on a subscription lifestyle - Netflix, Hulu, Pandora, Spotify, Peloton, etc. Even cell phones are sold showing monthly payment plans. So car dealers position pricing only on payments - and maybe younger folks just look at the monthly payment and think "I can afford that if I make a few changes" and then they never make the other changes. I never look at things based on payment because my parents taught me differently.

mmarshall

It's true that Millenials, these days, seem more wedded to their phones and electronic toys than to a traditional love for cars like my generation had, but, just the same, some live, work, and commute under conditions where a car is pretty much a necessity. Of course, that car does NOT necessarily have to be a new BMW M3 LOL.

Yeah...I was amazed at that, when I was shopping, last week, for my new i-phone7. Even for El Cheapo phones coating only a couple of hundred bucks, each phone not only had a monthly-payment-schedule set up (depending on the amount of GB data you got for that price) but the monthly-payments actually printed out on the display-stand with the phone. I had no idea that people actually paid for these things by the month....I mean, come on.....some of them were only a couple of hundred bucks, though, if you really wanted to splurge on an expensive one, you could spend as much as $1500. My Apple 7 was between $400 and $500....IMO a reasonable compromise for Apple quality.


That's where self-discipline comes in. And it doesn't mean that one necessarily have to give up everything else.....just look and shop for less-expensive versions of it. I've already done threads, for example, in Clubhouse, about shopping at stores like Target, WalMart, J.C. Penney's, etc...and saving a lot of money vs. the empty-your-wallet upscale stores. When you go to the the grocery store, get the generic-brand items instead of the national-brand stuff....it's markedly cheaper, and usually has the same ingredients and quality. You'll be surprised how much you can save over time.

Johnhav430

The strange thing about all of it, is, if a person states, "I am not leaving anything to charity and heirs. I plan on enjoying my life. You never know what will happen tomorrow." Everything becomes moot. There are people who have leased cars longer than I have been alive, look at their signatures. The cars tend to be very interesting, cars that I would like to have driven myself. They might have accepted the fact that they will always pay something towards a car. It is not their goal to not have a car payment.

I also get that paying late or defaulting is another story. And to some others' points, there doesn't seem to be any check at all to stop the consumer from hurting themselves.

Remember when Anthony Bourdain said there is no reason to shop at Williams Sonoma, all that stuff is available lightly used at supply houses, simply because 75% of restaurants go out of business quickly? That's how I look at things. I still like the nice stuff, but if I can I want to pay a fraction, not full retail. Snap On tools is an example, I have no idea why there are times when other bidders seem to be absent. I'll take brand new Snap On if it's 55% off list (Snap On can be verified by its date code which have been on their tools since 1927. Some of my stuff is likely older than anybody here, some brand new, some in between), why not....