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Subprime Auto Loans Hit a Ditch

Nearly 5 of every 100 subprime borrowers are now behind.

car in a ditch

News about consumer debt has not been pretty lately. From total credit card debt creeping towards $1 trillion by the end of 2016 to higher and higher rates of student loan default, it seems like many households are headed for financial distress caused by debt. Now a new report from S&P Global Ratings indicates subprime auto loan debt is also heading for trouble.

The latest statistics show 4.85% of subprime auto loans are more than 60 days behind. Subprime is defined by credit bureaus like Equifax as any borrower seeking financing who has a credit score below 640. A subprime loan generally means the borrower pays a higher interest rate and as a result, monthly payments are generally higher with these loans as well.

The auto industry has been relaxing borrowing standards over the past few years during the economic recovery. Unlike mortgage lenders who are now required by law to verify that applicants can repay the debt before any loan is extended, auto lenders don’t have the same restrictions. As a result, borrowers may be approved even if the financing they receive will create undue stress on their budgets.

“People often think that getting approved for a loan means that you shouldn’t have any trouble paying the loan back, but that’s often not the case,” explains Gary Herman, President of Consolidated Credit. “Just because you’re approved, it doesn’t mean the loan is the right choice for your finances. It’s up to consumers to evaluate their own financial situation to determine if they can afford financing before they apply for a new loan.”

Taking total cost into account

The challenge with an auto loan comes in the fact that the monthly payment amount is not the only cost the borrower needs to worry about when they purchase a new vehicle. In addition to new monthly payments for the loan, you also have to consider:

  1. Different insurance costs
  2. Different gas costs
  3. Registration costs

“If you borrow right up to the limit of what you can afford in your budget, you put your household in a high-risk situation with debt,” Herman says. “You may struggle to cover other transportation costs. And even if you don’t struggle at the beginning, any change in your financial situation or an unexpected expense can send your budget into a tailspin.”

Can auto loan debt be consolidated?

Auto loan debt cannot be consolidated within a debt management program because it’s a secured debt. Most consolidation requires you to roll in debts of a similar type. So you can consolidate credit cards and other unsecured debts on a debt management program, but not an auto loan.

If you’re struggling with an auto loan that’s too much for your budget to handle, you have the option of refinancing. You may be able to qualify for an extended term on the loan, which may lower your monthly payments and make it easier to afford the debt. However, you have to catch this early before you really start to fall behind. Otherwise, your credit score may not be high enough to qualify for a new loan.

“If you can’t refinance, look at your debts as a whole to see if something can be done to reduce the burden of your other debts,” Herman offers. “For example, you may also have high-interest credit card debt that can be consolidated to reduce your total monthly credit card payments by up to 30 to 50 percent. That may give you the extra breathing room you need to catch up and stay ahead of your auto loan payments.”

For a free debt and budget evaluation, call Consolidated Credit today at (844) 276-1544 or complete an online application to schedule a consultation with a certified credit counselor.

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