Vehicle loans, which have almost doubled in number since 2010, face a rising likelihood of mass-scale defaults with millions unemployed, future federal unemployment bonuses in doubt, and banks less able, or less willing, to defer payments or negotiate lower balances.
During the current crisis, auto lenders offered to defer payments for many borrowers for as long as four months, a term now coming to an end.
When the economic shutdown struck, the total national balance on vehicle loans was a record $1.35 trillion, with average individual balances also at peak levels.
Early this year, 5.1 percent of vehicle loans were 90 or more days late, rivaling the 5.3-percent peak during the Great Recession.
During that earlier crisis, vehicle owners usually managed to make their car payments even if they defaulted on their mortgages. Banks decided that expanding their inventory of vehicle loans was a safe way to bump up their revenue in a time of low interest rates.
Many lenders also spread out auto loans over seven years instead of the usual five, lowering monthly payments and allowing more people, including those with weaker credit, to afford them.
Many of the loans have been “subprime,” made to people with low credit scores, and were bundled into investment vehicles that do not allow changes to the terms of the loans they contain.
A significant number of vehicle loans also are now “under water,” with borrowers owing more than the car is worth.
Currently, the average price difference between a new car and the same one three years old is about $16,000, compared to the $11,000 difference that was typical in the Great Recession, according to Edmunds, an online vehicle pricing service.
Still, lenders will be reluctant to step up repossessions; a wave of repossessed vehicles would flood the used-car market and drive prices down, probably below what lenders would need to realize from selling them.
For now, lenders and borrowers are looking to Washington.
“Our fingers are crossed that Congress will come through with something,” said Amy Martin at S&P Global Ratings. “I think it would be a very bad scenario for consumers if they don’t.”
TREND FORECAST: The short term future on car loans will depend on how much free money the U.S. government will dole out to the deeply indebted unemployed. Long term, considering the damage inflicted on the economy by the lockdowns, defaults will rise and car sales will decline.