The auto loan is among the top loan types. Millions of people in the US take a loan to buy their cars. Interest in the auto loan is increasing with time. As a rule, cheaper loans offer small interest rates. As people are now borrowing a bigger amount, the interest rate is high. Hence, there’s always a chance of default.
We’ll come to that but first, take a look at auto loan interest rates between July 2016 and April 2018:
Notice how the interest rate is constantly increasing over the years. Fortunately, it wasn’t a huge increase and most auto buyers can afford to take the loan at an interest rate of 4.50% interest rate.
Taking an auto loan
There’s not much to write about the procedure, eligibility for qualifying and comparing different loan offers from different providers as we’ve covered that already. What is relevant for us to discuss here are the consequences of an auto loan.
Those who go for an auto loan don’t think of the consequences that may arise in case of an auto loan default. And they shouldn’t be blamed for it as many of them are young people. Getting a good job with a decent salary, buying a home (although this is becoming a distant quickly because of mortgage interest rates and all) and of course, buying a shiny car.
The shortest way to fulfill this dream is to take a loan. People are ready to wait to take a home loan but auto loans are hard to resist because the down payment amount is not too high unlike home loan and the interest rate, as we’ve seen above is not too darn high either. Naturally, the number of auto loan borrowers is high and so is auto loan default. When taking a loan, bear in mind you actively need to avoid any possibility of auto loan default.
In case of default
It’s easy to advise people not to default on an auto loan. But the reality is a number of auto loan defaults is high. What happens in case of a default?
Like any other loan, an auto loan default negatively affects your credit score. It poses a negative effect on your credit score. If an inability to pay off credit card debt or not paying your bills on time is bad, an auto loan is simply the worst, second only to a home loan default. Getting a score of 550+ could be hard if you default.
If there’s a stain on your credit report due to an auto loan default, it’d stay this way for the next seven years. During these seven years, it’d be nearly impossible for you get a loan as lenders would be put off by your credit report. You don’t want that, do you? Hence, take steps sensibly so that you could avoid an auto loan default and save your credit report.
Lack of finance
Many people whine that they want to repay the loan but are running short of fund. What should they do? In my opinion, negotiating with the lender is the most optimized solution if you feel you couldn’t pay back the auto loan at this moment.
Remember, negotiation doesn’t mean asking for forgiveness. We discussed in a previous article that a lender may forgive student loan, maybe not in its entirety but a sizable part of it. The same doesn’t hold for auto loan default.
Don’t expect the lender to forfeit the claim of the loan, negotiation means he might increase the tenure of repayment or lower the interest rate. You may get some extra time and that’s all. Don’t have any unreasonable expectation.
Subprime auto loan
We need to talk about subprime auto loan because it’s a thing in 2018. The cases of auto loan default are rising because of subprime lending. Deep subprime loans have been issued to people who credit scores are below 300. Analysts are worried that handing out subprime loans without a thorough background check and lax guidelines could cause problems.
The question for an average car buyer is how the subprime auto loan can hurt his chances of getting one. A market analyst called Don McConnell said: “As used-car values drop a bit and delinquencies and roll rates begin to increase, the subprime sector will show significant underperformance and lack of decent liquidity.” Increasing delinquency rate might push a lender to rethink his decision to approve you an auto loan.
Auto loan default rates
The stats are depressing. Studies indicate borrowers in the US are defaulting on auto loans at a very high rate – higher than during an economic meltdown. As a result, lenders are regularly rejecting people whose credit reports are not impressive. As a borrower, you need to assure them auto loan default is out of the question if they grant you the loan.
Tell yourself – no matter what happens I will not default on the auto loan. Work on your credit score, pay off all your unpaid bills. In short, do whatever you can to create the impression that you are a responsible borrower.