Avoiding the Ranks of Delinquent Auto Loans

Richard Barrington
LoanBiz Columnist


The percentage of delinquent car loans rose 11.5% in the second quarter of 2008, compared with the same quarter of 2007. In many ways, trouble with auto loans is a sign of the times, but the consequences for delinquent borrowers can be serious and long lasting. Therefore, this is a good time to review some ways to keep up with car loan payments. Auto loans are considered delinquent if payments are past due by 60 days or more. While people in financial difficulty sometimes practice a form of budget brinkmanship -- not making payments until repossession is the next step -- developing a bad credit record due to persistently late car loan payments is not a sensible long-term strategy.

Auto Loan Delinquencies: A Sign of the Times

The rise in auto loan delinquencies is consistent with the broader credit crisis facing the country. In fact, the mortgage crisis has contributed to the rise in auto loan delinquencies:

• If people are struggling to keep a roof over their heads, the mortgage payment is likely to be the first thing paid every month, and everything else, including car loans, has to get in line after that.
• With lending standards having become tighter, fewer people have been able to finance cars with home equity loans. This means more car loans, which often carry a higher cost than home equity loans.

While auto loans may be somewhat affected by the broader credit crunch, the news may not be bad as the headlines would indicate. That 11.5% increase is from a very small base--the number of auto loans in delinquency has gone from 0.61% in the second quarter of 2007 to 0.68% in the second quarter of 2008. In other words, less than 1% of all auto loans are in trouble. Also, the rate of delinquencies has not been increasing sharply this year, as the second quarter number represented an increase of just 0.03% over the first quarter's figure.

Tips for Avoiding Bad Credit from a Car Loan

Here are some ways borrowers can avoid joining that small but unhappy minority who are having troubles with their car loans:

• While a mortgage should be your first priority for payments, borrowers should try to refinance it to lower interest rates or to extend payments to create more room in the budget for car payments.
• Consider downsizing to a less expensive car.
• If all else fails, talk to the lender before late payments get out of hand. If possible, borrowers should go in with a plan for repaying the loan with just a slight adjustment of terms.

Moving quickly to solve the problem can keep your credit score out of the basement and the repo man out of your garage.

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.