For America’s working poor, an often essential ingredient for getting and keeping a job – having a car – has rarely been more costly, and millions of people are finding it impossible to keep up with payments despite prolonged economic growth and low unemployment.
More than 7 million Americans are already 90 or more days behind on their car loans, according to the New York Federal Reserve, and serious delinquency rates among borrowers with the lowest credit scores have by far seen the fastest acceleration.
The seeds of the problem are buried deep in the financial crisis, when in the midst of the worst economic downturn since the Great Depression, automakers slashed production. A decade later, that has made a relative rarity of used 10-year-old vehicles that are typically more affordable for low-wage earners.
According to data provided to Reuters by industry consultant and car shopping website Edmunds, the average price of that vintage of vehicle is $8,657, still nearly 75% higher than in 2010 despite some softening in prices over the last year. The average new car, in contrast, has seen a price rise of 25% in that same time period.
“This is pinching people at the worst point possible,” said Ivan Drury, Edmunds’ senior manager of industry analysis. “If you need basic A to B transportation, you have to get an older car that needs more repairs and has more wear-and-tear issues.”
Monthly auto payments for Americans making under $40,000 have remained flat since 2017, while those in higher wage brackets have seen their payments rise, according to a Cox Automotive Inc analysis for Reuters.
On the face of it, this might seem like good news. But to Cox chief economist Jonathan Smoke, it indicates poorer Americans are stretched so thin they cannot afford to pay more.
“They just don’t have any flexibility to increase their payment,” Smoke said.
Weak lending standards in recent years are partly to blame for the rising delinquency rates, which Warren Kornfeld, a senior vice president on Moody’s financial institutions team, said are approaching record highs despite a solid economy.
Auto lenders are belatedly tightening lending standards, but it may already be too late, he said.
“The economy is masking the true performance of auto loans,” Kornfeld said. “If we hit a downturn today, the performance of auto loans would not look very good.”
Research from the New York Fed earlier this year showed that while delinquency rates among borrowers with high credit scores have remained steady and low, for subprime borrowers they have been rising, pushing up the overall delinquency rate. Around 8% of loans originated by lower-score buyers with a credit score below 620 were categorized as seriously late, “a development that is surprising during a strong economy and labor market,” Fed researchers wrote.
