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Delinquent Auto Loans Are on the Rise as More Borrowers Drown in Debt
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Paula San Gabriel stopped making $400 monthly payments on her used
Jeep after it developed engine trouble. It sits in her driveway as she
saves money for repairs.
Paula San Gabriel stopped making $400 monthly payments on her used
Jeep after it developed engine trouble. It sits in her driveway as she
saves money for repairs. (By Mark Gail -- The Wa****ngton Post)
Buy Photo
Paula San Gabriel bought a Buick to replace her broken-down Jeep, on
which she had stopped making payments. She has since worked out an
extension.
Paula San Gabriel bought a Buick to replace her broken-down Jeep, on
which she had stopped making payments. She has since worked out an
extension. (By Mark Gail -- The Wa****ngton Post)
Buy Photo
[Chart: Percent of third-party auto loans 30 days or more overdue]
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By Ylan Q. Mui
Wa****ngton Post Staff Writer
Sunday, April 20, 2008; Page F01
The phone started ringing as soon as Paula San Gabriel of Bowie missed
her first car payment.
The 23-year-old college student bought a used Jeep Grand Cherokee in
2005 for $20,000. Gold with leather interior, it was the perfect car
for cruising around with her friends. San Gabriel put down $1,000 and
financed the rest under the easy lending standards that once seemed
ubiquitous: 9 percent interest with $400 monthly payments spread over
six years.
The ride was smooth until San Gabriel hit a road bump in January 2006.
The engine broke down, and her warranty had expired. Fixing her car
could cost as much as $5,000 -- money she could not spare considering
the size of her car note. Driven partly by financial crisis and partly
by sheer frustration, San Gabriel stopped making her payments the next
month. And the creditors started calling.
"I know the banks don't play," she said. "If you're missing $5 and
you're a day late, they re****t that stuff."
The turmoil that has roiled the housing market is also making waves in
the auto loan industry. Although auto loans have fixed interest rates
-- compared with the adjustable mortgage rates that have pummeled
homeowners -- many consumers are finding that they have taken on more
debt than they can handle to purchase their cars as well.
Delinquencies on indirect auto loans, which are made through a third
party and constitute roughly 90 percent of car loans, reached more
than 3 percent in the fourth quarter of last year, the highest rate in
at least 17 years, according to the American Bankers Association.
Delinquencies are defined as payments that are more than 30 days past
due.
The reasons for that rapid rise are varied, and anecdotal evidence
suggests that the delinquencies affect a broad swath of economic
cl*****. Some are the result of homeowners with ballooning mortgages
making tough decisions about which bills they can afford to pay. Other
car owners suc***bed to repayment plans of as long as seven years,
compared with the traditional maximum of five years. As a result,
Edmunds.com estimates, more than a quarter of auto loans are "upside
down," meaning the borrower owes more than the car is worth. The
average negative equity was $4,305.05 in March, up 32 percent from
March 2002.
"The auto industry is not exempt from the current stress that's out
there in the economy," said Carol Kaplan, spokeswoman for the ABA. "If
you're going through it right now, you're not alone."
The worst thing to do if you find yourself in trouble is to ignore it,
according to lenders and financial advisers. Whether you're in danger
of missing a payment or you're so far behind that repossessors are
knocking on your door, the first step toward resolving the problem is
to come clean. Call your lender and discuss your options -- you may
have more than you think.
"Yes, you can recover," said Philip Reed, consumer advice editor at
Edmunds.com. "But essentially what you need to do is . . . start again
building your credit up. . . . It does take quite a while."
If you know you're going to miss a payment . . .
Lenders suggest that you call them as soon as your bills start making
you nervous. Americans Well-Informed on Automobile Retailing Economics
(AWARE), an industry trade group that includes the American Financial
Services Association and the National Automobile Dealers Association,
said warning signs include avoiding looking at bills and difficulty
saving money.
Consumers should also realize that although they may have signed the
paperwork for the loan at the car dealer****p, the transaction is
financed by a third-party lending institution. Toyota Financial
Services, Ford Credit, Chrysler Financial and GMAC Financial Services
are among the largest. Check your paperwork to find out whom to call.
There is no penalty for giving them a heads-up.
"Overall, people are reluctant to face up to money issues -- whether
that's what your credit card interest rate is or if you're finding
you're falling behind on your auto payment," said Eric Hoffman,
spokesman for AWARE. "Sweeping it under the rug is not going to make
it go away."
GMAC said it will work with borrowers when they get behind and three
years ago launched a Web site called SmartEdge to educate consumers on
auto financing. Spokesman Michael Stoller said the company tightened
underwriting standards three times last year to require larger down
payments from borrowers with lower credit scores to safeguard both the
company and consumers.
"We don't want anybody to get in over their head," he said. At the
same time, "we're protecting ourselves from a business perspective as
well."
Creditors may be more lenient when you have a strong payment history
backing you up. In addition, let them know if the situation is
tem****ary -- a one-time budgetary hit from a hospital stay, for
example. They may be willing to give you a grace period to pay your
bills or even defer them for a few months.
"Chances are in this environment, if you have a reasonably average
credit rating, most lenders are going to be more than willing to work
with you," said Jack Gillis, spokesman for the Consumer Federation of
America. "A skipped payment can impact your credit rating as well as
make it more difficult to negotiate a new plan later on."
If you've already missed a payment (or more) . . .
On a recent afternoon, more than a dozen people gathered at Legal
Services of Northern Virginia in Falls Church for free advice on
filing for bankruptcy. Many were in danger of losing their homes, and
for some, their cars were not far behind.
One of the women attending the workshop was a 54-year-old stay-at-home
mom from Reston who spoke on condition of anonymity because she was
applying for jobs. She said she fell into a financial black hole after
she and her husband divorced about two years ago. She has been living
off money she received from him for her share of the family home,
along with about $360 a month in child sup****t for their two kids, but
funds are running out.
She was able to eke out her $615 payment for the lease on her Toyota
Highlander Hybrid in January but missed the next two months. She sent
her lender another check for part of the amount in April "hoping that
would call the dogs off," she said. But it left her with only about
$50 in her checking account. Her lease does not expire for another
year. Her phone has started ringing.
"You tend to avoid the phone calls," she said. "Sometimes I pick it up
and say, 'Look, I'm trying to get a job.' "
But it's never too late to make amends. If you've missed two payments,
don't miss a third. If you're three in the hole, don't make it four.
"Most lenders would rather have an adjusted payment schedule than
foreclose on the vehicle," Gillis said. "It's more expensive, and it's
a hassle. They're not in the business of reselling cars."
San Gabriel said she called her dealer to complain when her car broke
down after just a year on the road. She said she asked the dealer to
contact the lender to explain why she stopped making payments. But
once she started receiving phone calls from creditors, she realized
she was the one who had to discuss it with the lender.
San Gabriel negotiated a plan to extend the length of her loan to make
up for her missed payments. Her Jeep sits immobile in her driveway
while she putters around in a used $1,600 Buick that she purchased
with help from her father. She is trying to save money to get the Jeep
fixed.
"I definitely think that the bank that I'm working with is definitely
fair," San Gabriel said. "If somebody borrowed money from me, I'd
definitely expect them to pay it."
If you're at risk of defaulting or being repossessed . . .
At the end of the bankruptcy clinic in Falls Church, lawyer Nancy Ryan
distributed a handout titled "Can I Keep My Car?" The short answer:
It's getting tougher.
"They're getting more aggressive with the cars now," she told the
class. "They want everyone to be on the hook for the full amount of
the loan."
Another woman in the class, a 39-year-old from Alexandria, said her
Ford Taurus was repossessed in 2003 after she lost her job and could
no longer afford the payments. She still owed $10,000 on it, and her
lender has begun garni****ng her wages at her new job to collect that
debt.
A year ago, she bought a replacement car, a $14,000 used Ford
Explorer. She pays $466.01 a month for it but finds it hard to keep up
with the old debt still hanging over her.
"Now the past debt is going to cause me to lose this one," she said.
"I was trying not to go there. I was trying to work it out. But I
wasn't able to do it."
According to Edmunds.com, about 1.6 million autos will be repossessed
this year, about a 10 percent growth over last year. Financial experts
said that it is possible to bounce back from repossession or even
bankruptcy but that it requires kicking bad spending habits and
perhaps even a change in lifestyle. Credit-re****ting agency Equifax
said it takes seven to 10 years for a bankruptcy or collection to be
removed from your credit re****t.
"People need to think realistically about how much car they need and
what it's worth to pay for that," Reed said. "It all starts with
people getting in over their heads in the first place."
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