If you’re more than 90 days behind on your car payments, you’re considered seriously delinquent on your auto loan. This can have major consequences—it may even start the process of car repossession—and will undoubtedly cause a significant drop in your credit score.
Here’s what you should know about auto loan delinquencies and how to avoid them.
Trends in Auto Loan Delinquencies
Serious auto loan delinquencies have been on an upward swing in recent years as subprime borrowers have increasingly struggled.
According to the New York Fed, 5.1% of car loan balances were 90 or more days delinquent in the first quarter of 2020. That compares to 4.64% at the end of the second quarter of 2019, which was already the second-highest percentage since 2011, according to the report from the Federal Reserve Bank of New York. What’s more, delinquencies rose significantly during the period to one of the worst rates of transition since 2010.
Despite the strong economy, more borrowers with credit scores of less than 620—those considered a riskier bet—are falling into serious delinquency. In the fourth quarter of 2018, 8.18% of their auto loan balances became more than 90 days past due, the highest since 2010.
Why Are Delinquencies Getting Worse?
Overall delinquency rates have definitely been worse—as high as 5.27% in 2010 when the country was starting to pull out of the Great Recession. But Federal Reserve researchers say they’ve been watching the deterioration in recent years.
One explanation may simply be that more people are taking out car loans than ever before, so there are now more subprime borrowers than ever, and this type of borrower is at a higher risk of falling behind.
“The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector,” researchers wrote in a February 2019 report.
Not surprisingly, it’s younger Americans, who may have lower wages and a lot of student loan debt, who tend to struggle the most. Borrowers ages 18–29 have typically fallen into serious delinquency at the highest rates, followed by people ages 30–39.
How Can I Avoid Becoming Delinquent?
The most important thing you can do to avoid becoming delinquent on a loan starts well before you ever take out the loan.
Before you even think about buying a car, you need to have a realistic picture of your finances. How much do you make each month? How much are your fixed expenses—rent or a mortgage, child care, health insurance, food, and your other loans? How much do you need to save each month for retirement? Do you have a healthy emergency fund set aside?
Once you know how much is coming in and how much is going out, you’ll have a better idea of how much wiggle room you have for a car.
Remember that you won’t just be on the hook for your auto loan, but also insurance, maintenance, and fuel costs. Once you calculate how much money you can realistically afford for the car payment, you can start to determine how much car you can afford.
Once you have your budget figured out, you'll need to stay firm on this number and only look at vehicles that fit. When a pushy salesperson tries to pressure you, keep in mind how damaging delinquency is for your financial health. Is driving a slightly better vehicle worth jeopardizing your financial future? Realistically assessing your situation before you start dreaming of a new set of wheels puts you in a much better position to make a smart decision.
Of course, there are always unforeseen circumstances, and it’s impossible to prevent delinquency with 100% certainty. If you’re already behind, contact your lender to discuss your options. Lenders don’t want the hassle and cost of repossessing your vehicle, so they’re incented to work with you.
The Bottom Line
Economists are keeping a watchful eye on auto loan delinquencies amid a shift in the post-recession era. In fact, auto loans have become a bigger part of the country’s problem debt. They now make up 21 percent of all the “severely derogatory” household debt (any overdue debt that’s involved a repossession, foreclosure, or been written off by the lender).