The data show not all Americans are benefiting from the strong labor market… The share of subprime borrowers who fell well behind on car payments the last three months of the year was the highest since the second quarter of 2010.
~ Bloomberg.com (February 12th, 2019)
I told a girl I can start right away, and she said, “Listen babe I got something to say. I got no car and it’s breaking my heart, but I’ve found a driver and that’s a start.”
~ The Beatles (1965)
Sorry to sound so negative right out of the gate, but I wanted to prepare you for what’s ahead. Some of it… well, some of it’s not very pretty. (You, on the other hand, look GREAT today – have you done something different with your hair?)
I long ago gave up trying to predict what the economy was likely to do on a grand scale next week, next month, or next year. I still believe, however, in paying enough attention to what it’s already doing to make better choices for ourselves right now. Let’s dig into a few auto loan statistics – not just because we love charts, graphs, and economic trends, but because we care about OUR auto loans, OUR personal debt, and OUR credit ratings.
Those other folks will just have to figure it out for themselves. Guess they should have been reading these blogs like you, right?
I’ve written before about the basics of auto loan financing and the processes behind it. Let’s take a moment, though, and zoom in a bit on what’s going on “big picture”:
The most recent data from the Federal Reserve Bank of New York (they have a whole department dedicated to research and statistics) shows auto loan debt on the rise, along with every other sort of debt. Home mortgages are the biggest chunk of personal debt, which isn’t particularly surprising. As of the first quarter of 2019, mortgages account for 68% of the money we owe others – just over two-thirds of our total obligations.
Student loans are clocking in at around 11%. If you pay attention to the news or politics at all, you know this is a whole other topic itself. While most Americans, whatever their social status or political leanings, would agree on the potential value of owning a home, we’re not nearly as unified in our thoughts on going into debt in order to attend college. It’s a fascinating argument, full of controversy and hurt feelings and maybe even yelling and personal attacks. Still, we’ll save that one for next time. Auto loan statistics give us more than enough to think about at the moment.
As you can see on the graph, auto loans (the olive green segments) account for about 9% of our total debt. That’s nearly a dime out of every dollar we make going to pay for our cars and trucks, and if trends continue, they’ll pass that within a year or two. That’s more than our total credit card debt or any other sort of loans other than the two we’ve already discussed.
Here’s a personal challenge for you. Take a few minutes to examine the graph below from that same Federal Reserve Bank of New York I told you about above. What do you notice about it? What patterns or trends seem to be emerging? It’s always good to pay attention when people throw these sorts of graphs at us. This particular source is legit, but you’d be surprised how often less-reliable players bury us in stats presented in unforgivably deceptive ways.
Or maybe you wouldn’t.
Take a look. I’ll see you below in 2- 3 minutes.
The horizontal axis (the part along the bottom) indicates that these stats are drawn from the first quarter of each year from 2004 through 2019. In other words, January through March. Economic statistics often distinguish this sort of thing because our buying habits reflect an annual cycle as well as whatever long-term patterns emerge. For example, every year just before Christmas there’s a surge in retail spending (for obvious reasons). Comparing consumer spending in October of 2012 with consumer spending in March of 2015 might make it look like we’re spending less, when in reality we simply spend less in March than we do in October, no matter what year it is.
Nevertheless, the same trends in this particular graph would emerge whatever quarter they chose to compare. I’m sure you identified a few.
Over the past decade, auto loans for folks with credit scores of 620 or less (the darkest blue along the bottom of the graph) have risen, but seem to have plateaued a bit more recently. There’s a similar trend for scores in the 620 – 659 range (the orangish-yellow) and those between 660 – 719 (the light gray). Borrowers with a credit score between 720 – 759 (dark gray), however, continue to grow as a percentage of total borrowing, as do those at the top of the credit history food chain with scores of 760 or above (light blue).
In other words, our auto loan statistics are telling us that either people across the U.S. are improving their overall credit scores, or lenders are demanding better credit scores before making auto loans. Any guess which it is?
It’s both, actually. Despite the fact that the number of people behind on their vehicle loans is increasing, FICO scores are on the rise. (Your FICO score is the three-digit number, usually between 300 – 850, which gives a snapshot of your overall credit history. It will vary depending on which credit reporting agency is consulted.)
According to Experian, one of the Big Three credit reporting agencies used by the vast majority of lenders across the nation,
The average FICO Score has increased over time as the number of Americans with exceptional scores have grown. In 2018, more than 21% of Americans were considered to have an exceptional FICO Score, an increase of 5.6 percentage points from the average in 2005.
At the same time, this trend doesn’t seem to be reflected in how consistently people make their car payments. According to a recent report from the Motley Fool,
If you live in America and you are in debt, you are definitely not alone…
Among the more troubling facts… is the record 7 million Americans who are 90 days or more behind on their auto loan payments. It’s a signal, economists say, that Americans are struggling to pay bills despite other indications of a strong economy and low unemployment. Approximately 6.5% of all auto finance loans are 90-plus days past due.
OK, great – thanks for the brief but depressing lesson in auto loan statistics, Blaine. But what does this mean for me? Do I need to get used to walking to work? Fix up my bike? Should I start bumming a lift from my brother-in-law? Honestly, he’ll never let me forget the last favor he did for me; I don’t think I can stomach asking another.
In my mind, these numbers suggest a few things we should think through before taking out another auto loan.
Remember those online auto loan calculators I mentioned a few minutes ago? Once you’ve gotten the hang of your favorite auto loan estimator (it doesn’t hurt to try a few different ones), it’s probably a good idea to take a hard look at just how much you can genuinely afford before you get serious about car or truck shopping.
I’m talking actual math. Looking through the past several months’ mortgage payments, utility bills, credit cards, average amounts spent on groceries, entertainment, etc. I know this can be… unpleasant. I spent many years believing that the less I thought about money and how behind I was on everything, the better I must be doing. I know you’re not nearly the mess I was, but laying out our theoretical budget and comparing it to our actual spending is probably the least-fun part of thinking about getting a new (or new-to-us) vehicle.
Nevertheless, I’m asking you to do it. Not for me – I won’t know if you just keep skimming the article and never give this section another thought. I’m asking you to do it for your own clarity and peace of mind. Even if the news is bad, better to recognize that before you take out the loan.
Honest Money Tip:
Let’s be honest – you’ll probably still be able to get that loan and buy a vehicle. But the best way to be on the right side of next year’s auto loan statistics is to make sure you can make those payments on time by being realistic about how much you’ll spend going in.
You know the answer to this one, but perhaps you’ll feel better hearing it from someone else. There’s no point knowing auto loan statistics unless it helps you make good auto finance choices.
I won’t tell, but you shouldn’t be embarrassed. More people should be asking this question.
One of the most useful, although at times painful, lessons I’ve learned on my way to becoming as old and wise as I am now is that sometimes we need to be reminded of the simplest things. We’re busy people, often with complicated lives. Marriage and family alone can take up more emotional energy than we feel like we have, and by the time you add work and other obligations, it’s honestly a wonder we remember to bathe, let alone keep our financial life in perfect order. There’s no shame in revisiting a few basic ideas for keeping your loan payments timely.
Honestly, while we want you to be happy and everything, we also want you to start nudging next year’s auto loan statistics in a better direction. Here are some things to consider, remember, or try:
If you remember the bullet list we started with above, we’ve addressed most of the things I warned you about while trying to focus on what it all means for YOU in YOUR situation. Auto loan statistics are fascinating and all (well, I think they are – maybe I’m just weird), but not nearly as essential as figuring out your own situation and whether or not you should consider the wonderful array of online lenders, clean up and try your local banks, find some way to drop a few clues in front of rich Uncle Herschwilder, or a little of all of the above.
As I’m sure you recall from the intro, the sorts of credit scores demanded by auto lenders and the interest rates being charged are both going up. That can be a nerve-racking for those of us looking at auto loans with bad credit or any sort of personal loans with a less-than-perfect credit history. I’m not going to lie to you. It will be harder to get a great rate with shaky credit. It may be impossible to get any kind of auto loan from some traditional banks or credit unions.
You should still ask, even if you feel uncomfortable about it. You’ve come this far plowing through auto loan statistics; you can handle anything! Besides, there’s no reason to let embarrassment limit you on this one. This is America – we eat too much and spend too much and watch trashy TV and vote for all the wrong people. It’s not like you’re the black sheep of the family. If you have iffy credit, you fit right in! That doesn’t make it easy, but it does mean you should be confident and methodical in your search for your best auto loan options.
Still, it’s useful to have slightly better credit. It’s also possible. Whether you’re hovering around average, dangerously close to pretty good, or sunk deep at the low end of the credit swamp, the best time to start improving is now. The best way to start improving is to start.
Keep in mind that your credit score and even your full credit report may looks slightly different from reporting agency to reporting agency. It’s kinda like movie reviews – one guy may care more about the writing and another the acting, but in general, most great movies get great reviews, mediocre movies get mediocre reviews, and so on. You may not even want to look, but you really should. Don’t worry, I’ll stay right here until you get back. I’ll even be prepared with tissues, just in case.
Alright. Good news or bad, it is what it is. Auto loan statistics say every little nudge of that FICO score matters, so I’m going to wrap up by pointing you to some good advice on ways to nudge. I would NOT pay someone to “fix” your credit score or get too excited about anything claiming to immediately game the system in some way. You got into debt over time, probably through a long series of choices. Get out of it the same way. Think healthy living vs. crash diet fads… which one actually works most effectively over time?
I know we’ve covered a lot in one burst. Auto loan statistics can be a bit sobering. Take a breath, and don’t sweat it if you don’t remember it all the first time. It will still be here when you open your computer or phone tomorrow and you can refresh yourself on anything you missed. Or, if you’re ready to go a little deeper, we’re always happy to help connect you to online lenders who can answer your questions in more detail. It’s up to you what happens from there.
Still, I have a good feeling about you on this one. Go make good things happen.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.