Auto Loan Defaults Carry Good Lessons for New and Old Borrowers

Richard Barrington
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

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.   

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.

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