The auto industry had its hottest year in 2015 after moving 17.5 million vehicles for more than $500 billion in sales. But some of that unprecedented action is because of subprime loans, and there are dire consequences if you default on a car note.
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The subprime auto loan bubble
Experian Automotive recently reported 60-day delinquencies rose to 0.77%, up from 0.72% in the same period in 2014. At the same time, auto loan debt climbed to $987 million in the fourth quarter, up 11.5% from the same quarter in the prior year.
Skopos Financial is a lender catering to subprime customers. In a recent bond issuance, the company packaged the loans it made and sold them to investors. About 87% of the loans were made to borrowers with credit scores below 600, according to The Wall Street Journal. A third of borrowers had scores below 500 or insufficient data on file to even have a credit score.
If you’re living on the edge financially, what happens if you have a repossession of a vehicle after a job loss? Or after your income gets reduced or maybe you start drowning in unexpected medical expenses? Many people think you wash your hands of the car — like it or not — and you’re done. But no so fast…
Surrendering the car won’t be the end of your problem
During the time that you are slow paying or no paying, your credit is getting dinged. Eventually it will get to a point where lenders will charge-off the outstanding balance and also seize your car to sell at auction.
But here’s the thing that nobody understands: Let’s say you owe $8,000 on your car note. The financing company seizes the car and gets $6,000 at auction. There is a deficiency balance of $2,000. You can be sued for that $2,000.
Once the financing company has a judgment against you, it can be enforced with liens on your property and garnishments on your paycheck. Know that just giving a vehicle back does not necessarily end a bad situation.
So what should you do if you’re in a car you can’t afford?
You’ve got to keep paying on that car loan as agreed. Get a second job if you have to or reduce your existing expenses so you can throw more money at the car loan.
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