Repossessions, late payments and defaults are increasing

The prices of used cars increased in the midst of the pandemic because of issues with the supply chain that forced consumers to get larger loans that had higher APRs for their cars.

Even though vehicle prices began to fall towards in 2022’s end however, an alarming trend of defaults on auto loans and repossessions of cars has begun to show up.

According to most recent data according to the latest data, auto loans are the third most popular debt category for U.S. consumers with Americans are owed $1.52 trillion of auto loans.

The number of subprime car borrowers who were more than 60 days behind on their payments was 5.67 percent in December surpassing 5.04 percent in January 2009 during the height during the Great Recession, according to the credit rating agency Fitch Ratings.

Ally Financial (NYSE:ALLY), one of the largest suppliers of financing for cars within the U.S., said its proportion of car loans that were over 60 days in arrears was up to 0.89 percent in the fourth quarter of 2022, an increase from 0.48 percent in the previous year.

The problem goes beyond auto loans. Large banks and lenders are having similar problems in relation to credit card debt as well as mortgages, specifically in the case of Gen Z and millennial customers.

As a result, several key players — including Capital One Financial Corp (NYSE:COF). as well as American Express Co. (NYSE:AXP) — – have improved their lending criteria and increased their reserves for rainy days to protect against loss of loans.

Repossessions on vehicles are being reported to be increasing following a dramatic decrease at the beginning of the epidemic when Americans were encouraged by stimulus funds while lenders seemed more apt to give a silent eye towards late-paying customers.

“These repossessions are occurring on people who could afford that $500 or $600 a month payment two years ago, but now everything else in their life is more expensive,” said Ivan Drury, director of research at Edmunds on Edmunds’ January report by Edmunds.

If you’re shopping for a vehicle and require auto loans to finance your purchase, you are able to save some money by not making these two typical errors.

Read more about: There’s a good chance you’re overpaying for your home insurance. Here’s ways to save money for your peace of mind

Take care not to fall for negative equity

If you have more debt on the auto loan you have than the value of your car — also known as being “upside down” — then you’re in negative equity.

For instance, if have a balance of $15,000 on your auto loan, and your car has now a value of $10,000, you have a negative equity of $5,000 that you need to pay.

According to Edmunds according to Edmunds, the average amount due on loans that were upside-down in Q4 2022 was $5341, which was compared with $4,141 in the fourth quarter of 2021.

The process of dealing with negative equity requires some thought and may consume a greater portion of your budget for the month. If you aren’t able to pay off your previous auto loan from your own pocket then you’ll need to transfer the equity into your new loan. This could increase your chance of defaulting because you’ll be liable for the greater monthly expense of two vehicles all at once.

“As we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions,” Drury said.

“We are only seeing the tip of the negative equity iceberg.”

Don’t choose the shortest loan period

According to the car-buying web site Edmunds, the annual average percent rate (APR) for financing new vehicles was 6.5 percent during the 4th quarter (Q4) in 2022 as compared to 5.7 percent in the Q3 of 2022 and 4.1 percent in Q4 2021.

For loans on cars that are used the interest rates were higher, with the average of 10 percent in Q4 2022, in comparison to 7.4 percent in the fourth quarter of 2021.

The longer the loan period will be, the less monthly payment, however the greater the interest you’ll be paying.

Since the cost of used and new cars have risen and more Americans are looking for credit terms of more than 60 months..

In fact, the typical auto loan is now approximately 70 months, more or less than six years according to Edmunds This means that consumers are financing their vehicles for longer, even if it’s more expensive in the long process.

In addition to paying higher rate of interest on the mortgage, there’s also negatives of extending the loan.

The older your car is, the more likely you’ll need to pay for maintenance and repairs in addition to the monthly loan payments.

You may also become bored of your car over the length of a loan and leave you with years of installments you’re not willing to make, or having negative equity will be carried over in case you decide to purchase another vehicle.

Don’t forget about auto insurance

If you’re looking for the best price on a brand new car take a moment to compare prices on auto insurance, too.

Averagely, Americans spend $1,553 per year for car insurance. If you’ve not sifted through your options recently and you’re paying too much, you could end up paying more than $500 per year for this vital policy.

The best way to get savings on auto insurance is to spend a bit of time scouring the web and comparing rates.

In general, this could mean setting aside a few hours — or an entire day to contact different insurance companies and provide them with the information needed to obtain an accurate estimate.

However, with today’s comparison websites with a time of only three minutes you can locate the most affordable automobile insurance all in one spot.