Back in January and early February, some financial experts were predicting that subprime auto loans–vehicle loans to people with lower credit scores who were considered higher risk–might be the next housing bubble. Between 2009 and 2019, U.S. automobile loan debt increased by 75%, to more than $1.25 trillion. In early 2020, about seven million auto loans were 90 days past due.
Of course, at that point no one could have anticipated the financial challenges that lay ahead for many Americans. As the Covid-19 pandemic spread, tens of millions of people around the country lost their jobs. The unemployment rate has dropped significantly since the initial spike, but remains considerably higher than pre-pandemic. While the south is faring somewhat better than other parts of the country this fall, unemployment rates are still high: 6.3% in Tennessee, 6.6% in Alabama and 7.1% in Mississippi.
Delinquencies Declined in the Early Days of the Pandemic
The surge in unemployment could have triggered a wave of automobile repossessions, along with other negative consequences such as evictions and mortgage foreclosures. However, two factors combined to forestall widespread defaults and auto repossessions. First, pandemic aid in the form of stimulus checks and enhanced unemployment benefits stabilized finances for many who were abruptly out of work. In fact, many at the lower end of the earning spectrum found themselves–for a short time–with more funds available than they had while working full time. According to the Brookings Friedman Institute for Economics at the University of Chicago (BFI), the median unemployment benefit for an Alabama resident with the $600/week federal enhancement was 148% of regular income. The impact was similar in Mississippi (147%) and Tennessee (142%).
At the same time, a combination of government moratoriums and voluntary relief programs temporarily took the pressure off many people, including some who had already been running behind when the pandemic struck. Auto loan borrowers generally did not see the type of government protections extended to renters in many areas, homeowners with federally-backed mortgage loans, and student loan borrowers. But, many auto lenders implemented their own programs, including several offering 90-day deferrals.
So, in the early days of the pandemic, with unemployment soaring and the future uncertain, auto loan delinquencies dropped slightly. However, that figure was somewhat misleading. In April, more than 3.5% of auto loans nationwide were in “hardship” status, compared with just under .64% the previous month. In other words, the percentage of auto loans in hardship status in April was about 5.5 times as high as the same measure in March. Locally, the difference was even more extreme: in Alabama the percentage of motor vehicle loans in hardship status in April was 8.7 times the March figure.
Protections and Deferrals are Running Out for Many
For most people, the spring stimulus checks are long gone. The increased unemployment compensation expired, was replaced with a smaller boost, and then expired again. Income for those still relying on unemployment has dropped dramatically. While the median unemployment insurance recipient in Alabama, Mississippi and Tennessee was receiving 142-148% of regular earnings while the initial federal supplement lasted, median income through regular state-based unemployment in the three states is just 41-47% of what the recipient earned at work.
At the same time, those 90-day deferrals on automobile loans and other moratoriums and voluntary programs have expired. Even those who have returned to work may have catching up to do–and catching up is becoming an emergency for some. So, it is no surprise that delinquency rates on auto loans are rising again. The percentage of auto loans that are 60+ days delinquent has increased steadily over the past several months.
- In Alabama, the 60+ day delinquency rate rose from 1.94% in April to 2.72% in September
- In Mississippi, the 60+ day delinquency rate rose from 2.69% in April to 3.6% in September
- In Tennessee, the 60+ day delinquency rate rose from 1.33% in April to 1.78% in September
In short, the number of automobile loans creeping toward possible repossession is growing, but many still are not in a position to catch up, and options may be dwindling.
If you are in this position, it is in your best interest to be proactive. That may be as simple as contacting your lender. Do not make assumptions based on past experience–many lenders have changed their practices, at least temporarily. That may mean options that you are not aware of, like the opportunity for a deferral, interest-only payments, or some other solution that will help you stay on track.
Bankruptcy and Auto Repossessions
If you are out of options or simply recognize that months of financial strain have put you too far behind to regain control on your own, it may be time to learn more about bankruptcy. Both Chapter 7 and Chapter 13 bankruptcy can temporarily halt collection action, including repossession.
Of course, you cannot simply discharge your car loan in bankruptcy and keep your car, but an experienced local bankruptcy attorney like the ones at Bond & Botes can explain the options and help you determine the best path for you. For example, you may be able to redeem the car for less than the amount of your loan in Chapter 7 bankruptcy, or to catch up the past-due balance over time in Chapter 13. Many times, paying your car payment through a Chapter 13 bankruptcy plan can save you money since the interest rate tends to be lower and the balance is paid over 5 years. If you are in a situation where you are behind on your car payments, have a high interest rate and a high payment, a Chapter 13 could help you!
Tanya McCalpin is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. She holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from Birmingham School of Law. She enjoys serving her bankruptcy clients by helping them problem-solve and breathe a sigh of relief when their stress and worry has been lifted. Read her full bio here.