Dealerships throughout the country are reporting that customers are having a rough time making their auto payments.
The New York Fed says 60-day and over auto loan delinquencies in the subprime market (those with bad credit) hit a record high of 6.56%.
Hoping to avoid “auto bubble,” auto lenders are offering payment extensions to help prevent delinquencies.
The bad news is that it will cost borrowers more money to pay off the loan.
To stop from getting their car repossessed, subprime borrowers took advantage of the lenders’ extension plans at almost 5 times the rate of prime borrowers.
DriveTime’s extension rate went up from 4.71% to 6.41%. Carvana’s subprime loans jumped from 3.72% to 5.41%. Westlake’s subprime extension rate also climbed past 9.5%.
If a current borrower took a 6-month extension on a $25,000 loan at 15% APR, the customer would have to pay an extra $3,100 in extra interest and stretch the debt longer than what was agreed upon.
To help current customers, the CFO of Ally Bank, Russ Hutchinson, says the company is scaling back the timing of repossessions for borrowers to catch up on their loan extensions.
CarMax CFO Enrique Mayor-Mora stated that the company “began testing an enhancement to our policy that further empowers delinquent customers to take advantage of a payment extension.”
However, Florida Daily Financial Analyst Steve Beaman says this could get worse down the road. “If borrowers are having a tough time now paying back their original loan and now more money is added on, it’s possible these loans may not get paid off,” said Beaman. Beaman also added that it puts more pressure on banks and other auto lenders.
Currently, there is $126 billion in secure auto loans, which analysts say is around 18% of the $704 billion in total U.S. auto loan originations last year.
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