107 Million Americans Have Car Loans and It’s Not a Good Thing
If you’ve at all followed the automotive industry in the last few years, you’ll have noticed a common trend among manufacturers: nearly all of them seemed to boast about increased sales—specifically, about record sales since around 2007 and 2008, before the recession suddenly discouraged people from needlessly spending money.
Once the economy began to recover, many people chose to buy new cars—but that didn’t mean they could suddenly afford them, as according to data from the Federal Reserve Bank of New York, a whopping 107 million Americans (or 43 percent of the country’s adult population) currently have auto loan debt.
That’s up from 80 million in early 2012, at a time when more Americans had home mortgages than auto loans; now it’s the opposite, and auto manufacturers have reaped the benefits, though it seems that after reaching an all-time high in 2016, car sales are finally slowing down.
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Are loans inherently bad, though? After all, the point of paying for something over time via a loan is to be able to buy expensive but necessary items, such as a car or a home, which you wouldn’t otherwise be able to afford all at once. Assuming you can afford the payments, it should be a net benefit for everyone involved.
Unfortunately, that’s not always the case. Beth Yeager, who helps run the Pathway of Hope program for the poor at the Salvation Army in Louisville, Kentucky, told CNN that she routinely sees low-income people sign on loans with interest rates of over 20% to finance a car, as a result of not understanding credit.
This helps put into perspective the six million Americans who are 90 days or more behind on their car payments, putting them at risk of having their vehicle repossessed. For many, losing their car means being unable to go to work, which can create a vicious circle.
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The data also shows that low quality auto loans, the kind given to borrowers without good credit scores, reached the same levels in 2015 and 2016 as the notorious “sub-prime” mortgages had reached before the economic crisis.
All of this highlights the inevitable risk built into the credit system. People with good credit will get low interest rates, making it easier to pay off their bills on time and continue improving their credit score—no problem there. People with bad credit will get high interest rates, making it even harder to stay on top of payments, and thus worsening their credit score.
It seems strange to give the most expensive loans to the customers least likely to afford them, as though to guarantee they won’t be able to make the payments. Maybe if the lenders didn’t automatically assume people with low credit will default on their loans after a few payments, leading them to wring as much cash out of them as quickly as possible, those people might actually have a chance to pay their bills.