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Guest post: Consumer Finance Is Threatened By The Explosion In Auto Debts

Of late there is an explosion in auto debts experienced in the US market which in turn has posed a significant threat to consumer finances. The different advocacy group warns further effects in the world of consumer finance considering the key points and facts that are noticed through different studies and researches. A few of these key points include the data from the Federal Reserve Bank of New York. It shows that:

  • About 7 million Americans are behind their car payments in 2018 by at least three months which was 6 million in 2010
  • People with less than 620 credit scores are among the subprime borrowers that results in the high delinquency rate overall
  • The rate of auto debt delinquency stood at 16.3% by the middle of 2018 and in 2015 it was 12.4%
  • The average amount of a car loan was about $31,707 
  • The average loan length is about 69.1 month which was 61 months exactly in 2010.

Alarming as all these facts and figures are, all these point out at another alarming aspect of the behavior of the Americans. It shows the appetite of the American citizens to have new cars which continues to be growing and unabated.

Warning of the advocacy groups

In such situations it is quite natural that the advocacy groups will ring the alarm over this growing level of auto debts in US as a result of the inconsiderate attitude of the consumers. For example, PIRG warns that:

  • This continuously rising auto debt will eventually put several of these consumers in a state where they will be at a financially vulnerable position. 
  • They also warn that this situation will even worsen in case there is an economic downturn making them hard to manage their finance and debt and look up for a suitable way out of it at NationaldebtRelief.com and other sites. 

The PIRG report comes on the wake of the data released by the Federal Reserve Bank of New York.

The financial implications

Delving deeper into the financial implications of these debts, above and beyond the fact that more people are buying cars that ends up to be too much for them to afford, a separate report of PIRG shoes that the situation is largely related to the policies on which the Americans rely on their cars. It also shows that:

  • The aggregate amount of the auto debt carried by the consumers is approximately $1.27 trillion which is typically 75% more than the amount that they collectively owed at the end of 2009.
  • If this amount is adjusted for inflation then it will come to about 51% overall.
  • The total amount of auto debts accounts for 9% of the entire amount of consumer debt in the US which was 6% in 2011 which is in accordance to the separate data of Federal Reserve Bank of Kansas City.

As for the reasons, the report says that a major reason for having such an overwhelming amount of debt is due to the shifting preference of the consumers for a larger and more expensive vehicle. They are now more inclined to buy SUVs and trucks instead of more compact cars and sedans.

Another significant reason pointed by the auto research firm Edmunds is the considerable rise in price of the new cars which is about $37,100 for any average model as compared to $27,573 five years ago.

For the consumers this has serious implication on their finance given the fact that a majority of these consumers buy these cars on a loan. This means they carry higher balances on their car loans and that seems to stretch longer and longer, putting no end to their loans.

A burning example

The continuously deteriorating financial health of the consumers is revealed in a few studies and these statistical figures once again points out at the warning that the advocacy groups. It is the continual rise in the rate of interest that makes these loans even costlier. 

  • The average rate on an auto loan is approximately 6.2% now which was 5% a year ago.
  • Moreover, lower the credit score of a consumer will make the rate of interest even higher which may even come up to double digits. 

An example will make it clear for you to understand how this rise in interest rates affects the cost of borrowing making it more expensive for the consumers. 

  • Assume that you pay 4% interest on a loan of $30,000 for 72 months. This means you will pay $470 each month as interest and end up paying an extra amount of $3,800!
  • On the other hand, if for the same amount and for the same length of time the rate of interest is 10%, your monthly payments will come up to $555 and the interest will total more than $10,000!

Moreover, the longer the term of the loan, the greater will be the total amount of interest you pay. Do not be surprised if you find that by adding the principal amount of your loan and the total interest amount turn out to be much more than the actual value of the car you have bought!

Keeping the cost down

The experts suggest that the consumers therefore need to find auto loans that are inexpensive and do some research for that. Other ways to reduce the cost include:

  • Getting preapproved at the bank or credit union
  • Avoiding add-ons offered at the dealership
  • Exploring other options such as buying a used car and 
  • Avoiding the tricks and traps of the dealers such as an extended warranty or an undercoating.

Moreover, they suggest that the best way to keep the cost of the loan as well as their purchase down is to secure the loan before they head to the dealership. This is because it will help them prevent situations when the dealer based finance will present them with options that will cost them more in interest.

The best tip: Consider your affordability before you take out a loan so that you can repay it on time with no defaults. 

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