Auto Loan Defaults Carry Good Lessons for New and Old Borrowers
Richard BarringtonLoanBiz Columnist
There's an old
saying: "It's an ill wind that blows nobody good." This adage applies to recent news about auto
loan defaults. Although it is certainly bad news that auto loan defaults are on
the rise, the positive that can be derived from this is that these defaults
provide valuable lessons. These lessons can help anyone contemplating a new auto
loan, as well as anyone struggling to make existing car payments. First the
data: the delinquency rate for auto loans arranged by dealers recently climbed
to a 16-year high. Even high-quality borrowers are falling behind, as loans to
prime customers rose to new highs, exceeding levels set in 2001.
Auto Loan
Delinquencies
Auto loan delinquencies are defined as loans with car
payments more than 30 days past due. Not all delinquencies result in defaults,
of course, but trends in delinquency rates can be an early clue to changes in
default rates. To keep it in perspective it should be noted that auto loan
delinquency rates are still below 3%, but even these relatively few problems
are often avoidable.
New Auto Loans: The
Budget Should Rule
How can new borrowers avoid this kind of trouble? One way is for borrowers to ignore "rule
of thumb" loan qualifying criteria, in favor of being governed by their
own budgets. There are certain broad guidelines that indicate how much car a
person can afford given his or her income level, but the truth is that
everybody's situation is a little different.
Instead of being guided by a general rule, borrowers should
start with their own budgets, deciding how much car payment they can reliably make
every month. Working with a car payment calculator, it is then easy to determine
the total loan available at current auto loan interest rates. This allows new
car buyers can come up with a target price based on their own specific budgets.
Existing Auto Loans:
Refinancing To Lower Car Payments
Another thing the loan delinquency figures bring to mind is
that borrowers can and should take steps before their loans fall into delinquency
and default. For example, with auto loan interest rates having fallen recently,
a natural step would be to look into lowering car payments by refinancing the
loan. The borrower's current lender would be a good place to start, but
ultimately it is wise to shop around for competing auto loan interest rates.
It is always painful to have to learn from one's own
mistakes. Auto loan delinquency data offers an opportunity for borrowers to
learn from the mistakes of others, both in originating a loan and in dealing
with car payment problems.
Source:
The
Detroit News
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
