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Auto loan delinquencies rise. What to do if you struggle with payments
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For a rising share of car owners, monthly auto loan payments appear to be evolving into a problem.
While borrowers who are behind on their payments by more than 60 days represent a tiny portion of all outstanding auto loans — 1.84% — their ranks are growing, according to a recent report from Cox Automotive. The share was 26.7% higher in December than the year-earlier month and is largely concentrated among borrowers with low credit scores.
“The danger of struggling to pay an auto loan is not just risking your car getting repossessed, it’s the long-term impact on all of the other areas of your finances,” said certified financial planner Angela Dorsey, founder of Dorsey Wealth Management in Torrance, California.
High prices, interest rates have led to bigger payments
A combination of market factors have pushed up monthly loan payments. And as personal savings have dwindled and persistent inflation has squeezed household budgets, keeping up with payments may become even more challenging.
The average price paid for a new car reached a record $47,362 in December, according to an estimate from J.D. Power and LMC Automotive.
Monthly payments in the fourth quarter averaged $717, compared with $659 a year earlier, according to Edmunds. The share of buyers who took on monthly payments of $1,000 or more reached 15.7%, compared with 10.5% a year earlier. In the fourth quarter of 2020, just 6% of borrowers had monthly auto payments that large.
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Rising interest rates also have affected affordability. The average rate paid on a new car loan was 6.5% at the end of 2022, Edmunds data shows. For used cars, the average was 10%. A year earlier, those rates were 4.1% and 7.4%, respectively.
Loan delinquencies can harm your credit score
While the auto loan delinquency rate is edging higher, the default rate is not, according to Cox. Entering default — when your lender determines you are not going to pay, usually some time after 90 days of no payments — can translate into your car being repossessed.
Yet even being too late on one payment has a negative effect on your financial life, and it can be long-lasting.
“If you’re 30 days late, it impacts your credit score,” said Brian Moody, executive editor of Kelley Blue Book.
That’s when lenders typically report the late payment to credit-reporting firms Equifax, Experian and TransUnion.
Also, you should be aware that because your payment history is the most influential factor in your credit score — it typically accounts for 35% of it — you could see a drop of 100 points due to being 30 days late with a payment, according to NerdWallet. The longer the loan goes unpaid, the bigger the hit to your score, and that delinquency can remain on your credit report for up to seven years.
As consumers generally know, the lower your score, the more likely you are to pay higher interest rates on new loans or credit you get. Additionally, a poor score or poor credit history may cause you to pay higher premiums on auto or homeowner’s insurance and affect your ability to rent an apartment or even get a job. Employers can’t see your score, but they can check your report.
What to do if you’re struggling with auto loan bills
For car owners who are pretty sure they’re heading toward delinquency, it’s important to try preventing the problem from snowballing.
“If you sense this is coming, be on top of it,” Moody said. “Don’t do nothing. It won’t get better on its own.”
If you’re struggling to keep up because you don’t budget well, that’s at least potentially fixable, experts say. In that case, take a hard look at how you’re spending money.
“Take a look at your overall expenses for the last few months,” said Joe Pendergast, vice president of consumer lending for Navy Federal Credit Union. “You would be amazed how much the average person spends each month without realizing it.”
However, if the payments are simply not manageable, the first thing you should do is bring your lender into the loop.
“If a consumer is struggling to make their car payments, or anticipates challenges ahead, they should reach out to their financial institution as soon as possible,” Pendergast said.
The sooner your bank or credit union is made aware, the easier it is to come up with possible solutions.
Joe Pendergast
Vice president of consumer lending for Navy Federal Credit Union
“The sooner your bank or credit union is made aware, the easier it is to come up with possible solutions,” he said.
While the options vary from lender to lender, you may be able to get a deferment — i.e., a few months without a payment — or a new loan that lowers the payments by stretching out the length. Either way, be aware that this generally would lead to paying more in interest, noted Moody of Kelley Blue Book.
However, a deferment would at least give you time to figure out how to best manage your situation, he said.
For example, you could sell your car with the intent of buying a lower-priced one — or, perhaps, even going without one if you have other transportation options. Just be aware that depending on how much you owe on the loan, the price you get for your car may not fully cover your balance, which would mean you’d still owe the lender money.
There may be a similar value gap if you opt to trade it in. While trade-in amounts have been relatively high due to used-car values being elevated, that is changing. The latest inflation reading showed a year-over-year drop of 8.8% in used car prices.
And if the amount a dealer is willing to give you is less than what you owe on the loan, you will either need to pay off the remaining balance or roll it into your new loan. This so-called negative equity averaged $5,341 in the last quarter of 2022, Edmunds data shows.
“None of these [options] are ideal,” Moody said. “They are all under the heading ‘better than nothing.'”
The Reserve Bank of India (RBI) is expected to pause their interest rate hike and the current 6.5 per cent repo rate could be the terminal rate for now, said SBI Research in its latest Ecowrap report.
The repo rate is the interest rate at which the RBI lends money to all commercial banks.
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The next monetary policy meeting is scheduled for the first week of April 2023.
At the latest Monetary Policy Committee (MPC) of the RBI in early February, it decided to raise the repo rate by 25 basis points to 6.5 per cent to keep inflation expectations anchored, break the persistence of core inflation, and strengthen the medium-term growth prospects.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
In early 2020 when Covid hit the world, the repo rate was 4 per cent.
“The (RBI’s) stance could continue to be withdrawal of accommodation, even as liquidity is now in deficit mode. RBI can always keep the options open in June (monetary) policy,” the SBI Research, authored by Group Chief Economic Adviser State Bank of India Soumya Kanti Ghosh, said.
The report asserted that the RBI has enough reasons to pause the repo rate hike in the April meeting.
“There are concerns of a material slowdown in the affordable housing loan market and financial stability concerns taking centre stage. While concerns on sticky core inflation is justified, it may be noted that average core inflation is at 5.8 per cent over the last decade and it is almost unlikely that core inflation could decline materially to 5.5 per cent and below as post-pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will act as the constraint. By this logic, RBI may then have to go for more rounds of rate hikes,” it explained in the report.
Notably, retail inflation in India fell marginally but remained above RBI’s 6 per cent upper tolerance band for the second straight month in February 2023, with the Consumer Price Index pegged at 6.44 per cent. In January, the retail inflation was 6.52 per cent.
India’s retail inflation was above RBI’s 6 per cent target for three consecutive quarters and had managed to fall back to the RBI’s comfort zone only in November 2022. Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.
On India’s inflation, the Ecowrap report forecast March and April to be 5.5-5.6 per cent and 4.7-4.8 per cent.
“Thus, the RBI will have a delicate balancing job of either looking forward to the June meeting with clear signs of inflation trending downwards or looking backwards at the Jan and Feb prints in April policy. Thus, it will be a delicate choice (for RBI),” the report said.
Not just India, US monetary policy committee too is on an interest hike spree in the fight against inflation.
The US monetary policy committee, seeking to achieve maximum employment and inflation at the rate of 2 per cent over the longer run, hiked the key interest rate by 25 basis points to over a 15-year high of 4.75-5.0 per cent at its latest two-day review meet last week. The latest hike was the same size as its previous rate increase in the February meeting and marked its ninth straight rate hike.
The hike comes amid the dilemma faced by its central bank on inflation targeting and on maintaining banking sector stability – the former is way above target and the latter is shaky after the recent collapse of a couple of banks and the contagion effect on others.
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Meanwhile, consumer inflation in the US moderated in February to 6.0 per cent from 6.4 per cent the previous month, but the numbers are still way above the 2 per cent target. It was at 6.5 per cent in December, and 7.1 per cent the month before.
“Fed rate hikes could be smaller in magnitude, and one last in May policy of 25 bps,” SBI Research said.
“The challenge is now to decouple from Fed. But the good thing is that a dovish Fed means soft dollar and thus lower depreciation risk for the Indian rupee in the short to medium term,” it added.
In a statement that will bring massive relief to Flipkart employees amid the ongoing layoffs in companies across the globe, Flipkart’s Chief People Officer (CPO) has said the homegrown e-commerce has ‘no intention of making mass layoffs.’
This is because the organisation does not believe in hiring in bulk as doing so often leads to firms laying off staff to lessen the headcount, said Krishna Raghavan in an interview with HT’s sister publication Mint.
“We do responsible hiring and there are no mass layoffs happening at Flipkart. We don’t hire in thousands and then land up figuring out that we have too many people on board, and resort to extreme measures,” remarked Raghavan.
He added that the Walmart-owned company’s recent decision of not giving salary hike to senior management did not mean there would be job cuts, as hikes and promotions were given last year.
Flipkart’s stand is in complete contrast to that of its prime competitor Amazon, where more than 27,000 employees have already lost jobs since January.
‘No delays in onboarding freshers’
Raghavan further said there were ‘no delays’ in onboarding freshers who, he added, will join in June. “We are very thoughtful and deliberate on how we do workflows planning in general,” stated the Chief People Officer.
Wipro, for example, is yet to onboard last year’s graduates. The IT major major says it has been forced to delay this due to the ‘changing macro environment.’
Economists are lowering their forecasts for India’s current-account shortfall, thanks to favorable trade trends that are proving to be a blessing for the rupee — among the worst performers in emerging Asia this month.
Barclays Plc expects the gap in current account — the broadest measure of trade in goods and services — to be 1.8% of gross domestic product in the year starting April 1, after previously cutting it to 1.9% from 2.3% deficit it had estimated in mid-February. Citigroup Inc. slashed its forecast even further to 1.4% of GDP from 2.2%, reflecting a steady drop in goods imports and strength in services exports.
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The lower prints will provide a tailwind to the rupee, which is vulnerable to a selloff, given the twin deficits in the nation’s budget and current account make it more reliant on foreign inflows. A narrowing shortfall will also take the pressure off the central bank to sell foreign exchange from its reserves to stabilize the currency and check imported inflation.
“We are encouraged by the fact that the narrowing of the trade deficit has sustained and services exports remain strong,” said Ashish Agrawal, head of foreign-exchange and emerging-market macro strategy research at Barclays in Singapore. “The lower current account deficit reduces dependence on financing flows and RBI’s dollar sales at the margin.”
That’s an added positive for the rupee, which along with Asian peers gained against the dollar after a dovish interest-rate hike by the Federal Reserve. The rupee was up 0.2% to 82.30 to a dollar on Monday.
Services Surprise
What seems to have caught economists by surprise is the strong services exports print.
Services trade surplus was strong at $14.6 billion in February, building on January’s revised surplus of $13.8 billion. Services exports nearly touched $30 billion in both January and February, an increase of about 40% on-year.
HSBC Holdings Plc attributes a part of this rise to Global Capability Centres set up by large multinational corporations. India is home to about 40% of global GCCs, and this ratio is only expanding as they rise in scope, an HSBC report said.
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“Services trade surplus is truly a hero in India’s foreign trade story right now,” said Dhiraj Nim, an economist and forex strategist at Australia and New Zealand Banking Group, who is confident the trend will continue.
Barclays expects the improving external sector fundamentals and relatively cheap valuations to help the rupee rally later as the dollar weakens. But most remain cautious amid global volatility and the Reserve Bank of India’s aim to build back reserves at every opportunity.
From the current account perspective, this augurs well for the rupee, said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. That said, the global situation is extremely fluid and could adversely impact global risk appetite for risk EM assets, including the rupee — emerging Asia’s worst performing currency last year and among the bottom this year.
“Thus the capital account side also needs a watch,” she said.
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