The economy is strong. Why are people struggling with auto loans?

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The economy is strong. Why are people struggling with auto loans?

Despite a strong job market, millions of Americans are falling behind on their auto loans. More than 7 million people were delinquent by 90 days or more on their auto loans by the end of 2018, according to the Federal Reserve Bank of New York. That's more than a million more troubled borrowers than there were in 2010.

The rising number of delinquent loans shows that not everyone is benefitting from the strong labor market.

"Working-class Americans, lower-income Americans are not seeing raises in their income," said Jack Gillis, executive director for the Consumer Federation of America. "The so-called tax credit really didn't trickle down to them." (Learn why your tax refund might be shrinking.)

Who is falling behind?

Credit report data showed more than $584 billion in new auto loans in 2018, the highest the New York Fed has seen in the 19 years it's tracked the numbers. Most borrowers had good credit scores above 720. Despite that, the share of loans that became delinquent for more than 90 days rose from 1.5% in 2012 to 2.4% at the end of 2018.

That's because borrowers with lower scores have started falling behind. Borrowers with credit scores less than 620 have increasingly struggled to keep up with their loans since 2012, though the economy and labor market have grown stronger over the same period.

Most of these borrowers took out loans from auto finance companies, as opposed to banks, credit unions and dealerships. Loans from these companies perform much worse than loans from other sources: 6.5% of auto finance loans are 90 days past due, compared to 0.7% of loans from credit unions. (Here's why you should get a loan before you go to the dealership.)

Among age groups, people under 30 have had the hardest time keeping up with their auto loans. That might have to do with outstanding student loan debt reaching a new high of $1.46 trillion.

How to avoid falling behind on auto loans

A delinquent auto loan can hurt your credit score.

"It's something that can affect everything from being able to qualify for electric or gas accounts to increasing the cost of your car insurance," Gillis said.

Some consumers make the mistake of setting their hearts on one car and borrowing as much as they can to get it.

"The better course of action is to take out a loan where the monthly payments may be to 20% to 25% lower than what you would qualify for," Gillis said.

That might mean compromising on the vehicle you choose, but it will make it easier to keep up with payments.

Prospective borrowers should also try established financial institutions and avoid independent lenders.

"One of the reasons there's a higher default rate on independent loans is they tend to have much higher interest rates and therefore, the monthly bill is harder to swallow," Gillis said.

If you do fall behind on an auto loan, contact the lender and see if you can restructure your payments, he said.

"It will cost you more in the long run if, for example, the lender allows you to reduce your monthly payment but at least it will keep the car in your hands," Gillis said.

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Image: Neil Kremer