Auto Loan Defaults on the Rise
Many people filing bankruptcy do so in hopes of saving their homes.
Indeed, the news has been full of reports on the foreclosure crisis and rising rates of people filing bankruptcy, despite the passage of more restrictive bankruptcy laws in 2005.
As the credit crunch continues to drag the economy toward recession, though, home loans are not the only ones slipping into default, and not the only ones that can be protected in a bankruptcy filing.
According to the Wall Street Journal, auto loan default rates are increasing rapidly. Standard & Poor's reported that 2.01% of car loans made in 2006 were already past due in November of last year. This figure is reportedly higher than it's ever been, and stats are already looking worse for 2008.
A CBS News affiliate notes that the practice of reporting "stated income" to qualify for car loans has become prevalent. This practice, of course, is fraudulent, since stated income reflects a figure larger than actual income, and is sometimes inflated by tens of thousands of dollars.
By reporting a falsely elevated income level, some borrowers illegally qualify for bigger car loans and can buy or lease nicer cars. Of course, as happened in the housing market, most borrowers end up defaulting on such loans, since they cannot really afford them.
So why has the credit crunch started pinching the auto industry as well? Theories abound.
According to the Denver Post, vehicle repossessions in some areas have nearly doubled since this time last year. And one repo man evidently blames two main factors: gas prices and other loans. This makes sense, considering that energy and fuel costs have been creeping upward for some time now.
And, with rising levels of credit card debt and more and more homeowners defaulting on mortgages, and/or seeking the protection of bankruptcy, people are certainly juggling debts these days. It seems some Americans are forced to choose the lesser of two evils, and let the car payments go in order to keep the house.
Plus, when the housing market was booming, many people took out loans against their houses, and some bought cars with those loans. Now, with housing values plummeting and second mortgages demanding payments, those cars might not look so affordable.
Unfortunately, increasing car defaults mean more bad news for the economy.
The auto industry, responding to increased loan default rates and a reported 2.5% decrease in sales last year, has begun offering new loan options, according to sources. USA Today reports that some car dealerships are now marketing long-term loans to buyers - loans to be paid back over 84 months, 96 months, or even 102 months.
This, of course, will mean lower monthly payments, but will likely have unwanted side effects. Apparently, the current trend among buyers of new cars is to pay three to four years of a five year (60 month) loan, then trade the car in for a new one.
With five year loans, the value of the car is still slightly more than the remaining loan balance at this point; with a seven year loan, that wouldn't be the case.
Basically, according to sources, car buyers who take on long-term loans generally aren't planning to buy another new car for several years. This, of course, is not good for the auto industry.
WSJ also reports that auto loans are packaged and sold in much the same way as home loans - put into pools and then divided up and sold to investors. So defaulting on car loans could have similar economic ripples as defaulting on mortgages.
If you're looking for a way to save your car from repossession, Chapter 13 bankruptcy could provide you with the protection you're looking for to get your finances back in order.