Ally Financial recently reported an increase in the percentage of car loans that were more than 60 days overdue. According to their data, this number rose to 0.89% in Q4 2022, up from 0.48% a year earlier.
The rise in delinquent car loans could be a clear indication that many Americans are struggling to keep up with their financial obligations, especially in the wake of the COVID-19 pandemic and the following cost of living crisis.
It has been reported that vehicle repossessions are also on the rise. This comes after a sharp drop at the start of the pandemic when Americans were being supported by stimulus checks, and lenders were more willing to turn a blind eye to late payments. However, with the stimulus checks gone and the cost of living continuing to rise, many people are finding it difficult to make ends meet, let alone pay their car loans on time.
Ivan Drury, director of insights at Edmunds, explained that repossessions are happening to people who could have afforded their monthly car payments two years ago. Now, with everything else in their life becoming more expensive, these same people are finding it difficult to keep up. As the cost of car ownership becomes more burdensome, it is crucial to find ways to save money and avoid common mistakes when getting an auto loan.
One way to save money is by taking a closer look at your current auto insurance policy. If you have had the same policy for a long time, it might be wise to shop around for a better rate to help bring those monthly bills down.
Additionally, when considering an auto loan, there are two common mistakes to avoid: negative equity and long loan terms.
Negative equity is a situation where you owe more on your auto loan than your vehicle is worth. This is also known as being “upside down” on your loan. Dealing with negative equity will require some planning and could end up taking a larger chunk out of your monthly budget.
If you cannot pay off your old loan out of pocket, you will have to roll the negative equity over to your new loan. This increases your risk of defaulting as you will be dealing with the higher monthly cost of paying for two cars at once.
Another mistake to avoid is going for the longest loan term possible. The longer the loan term, the lower the monthly payments, but the more interest you will end up paying. As the costs of new and used cars continue to rise, more Americans are seeking loan terms above 60 months, or five years.
However, extending the loan term can result in having to pay more interest on the loan, as well as dealing with other setbacks, such as having to spend money on repairs and maintenance for an older car.
Another way to save money on car ownership is to consider buying a used car instead of a new one. While the cost of used cars has also been rising, they remain generally less expensive than buying new.
However, used cars come with their own set of risks and considerations. For example, a used car may have a higher likelihood of needing repairs or maintenance, and it may not have the same warranty or protection as a new car.
To mitigate these risks, do your research before buying a used car. Look up the car's history and maintenance records, and consider having a mechanic inspect the car before you make a purchase.