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Delinquent Auto Loans Add To Borrowers' Woes

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By YLAN Q. MUI

The Washington Post

Published: April 27, 2008

The turmoil that has roiled the housing market is also making waves in the auto loan industry. Although auto loans have fixed interest rates - compared with the adjustable mortgage rates that have pummeled homeowners - many consumers are finding that they have taken on more debt than they can handle to purchase their cars as well.

Delinquencies on indirect auto loans, which are made through a third party and constitute roughly 90 percent of car loans, reached more than 3 percent in the fourth quarter of last year, the highest rate in at least 17 years, according to the American Bankers Association. Delinquencies are defined as payments that are more than 30 days past due.

The reasons for that rapid rise are varied, and anecdotal evidence suggests that the delinquencies affect a broad swath of economic classes. Some are the result of homeowners with ballooning mortgages making tough decisions about which bills they can afford to pay. Other car owners succumbed to repayment plans of as long as seven years, compared with the traditional maximum of five years. As a result, Edmunds.com estimates, more than a quarter of auto loans are "upside down," meaning the borrower owes more than the car is worth. The average negative equity was $4,305.05 in March, up 32 percent from March 2002.

"The auto industry is not exempt from the current stress that's out there in the economy," said Carol Kaplan, spokeswoman for the bankers association. "If you're going through it right now, you're not alone."

The worst thing to do if you find yourself in trouble is to ignore it, according to lenders and financial advisers. Whether you're in danger of missing a payment or you're so far behind that repossessors are knocking on your door, the first step toward resolving the problem is to come clean. Call your lender and discuss your options; you may have more than you think.

"Yes, you can recover," said Philip Reed, consumer advice editor at Edmunds.com. "But essentially what you need to do is ... start again building your credit up. ... It does take quite a while."

If you know you're going to miss a payment: Lenders suggest that you call them as soon as your bills start making you nervous. Americans Well-Informed on Automobile Retailing Economics, or AWARE, an industry trade group that includes the American Financial Services Association and the National Automobile Dealers Association, said warning signs include avoiding looking at bills and having difficulty saving money.

Consumers should also realize that although they may have signed the paperwork for the loan at the car dealership, the transaction is financed by a third-party lending institution. Check your paperwork to find out whom to call. There is no penalty for giving them a heads-up.

"Overall, people are reluctant to face up to money issues - whether that's what your credit card interest rate is or if you're finding you're falling behind on your auto payment," said Eric Hoffman, spokesman for AWARE. "Sweeping it under the rug is not going to make it go away."

GMAC said it will work with borrowers when they get behind; three years ago it launched a Web site called SmartEdge to educate consumers on auto financing. Spokesman Michael Stoller said the company tightened underwriting standards three times last year to require larger down payments from borrowers with lower credit scores to safeguard the company and consumers.

"We don't want anybody to get in over their head," he said. At the same time, "we're protecting ourselves from a business perspective as well."

Creditors may be more lenient when you have a strong payment history backing you up. In addition, let them know if the situation is temporary - a one-time budgetary hit from a hospital stay, for example. They may be willing to give you a grace period or defer the payments for a few months.

"Chances are, in this environment, if you have a reasonably average credit rating, most lenders are going to be more than willing to work with you," said Jack Gillis, spokesman for the Consumer Federation of America. "A skipped payment can impact your credit rating as well as make it more difficult to negotiate a new plan later on."

If you've already missed a payment (or more): It's never too late to make amends. If you've missed two payments, don't miss a third. If you're three in the hole, don't make it four.

"Most lenders would rather have an adjusted payment schedule than foreclose on the vehicle," Gillis said. "It's more expensive, and it's a hassle. They're not in the business of reselling cars."

Paula San Gabriel, 23, a college student from Bowie, Md., bought a used Jeep Grand Cherokee in 2005 for $20,000. She put $1,000 down and financed the rest: $400 monthly over six years. The ride was smooth until a year later, when the engine broke down after the warranty expired. The repairs could cost as much as $5,000, which she couldn't afford, considering the size of her loan, so she stopped making payments the next month.

San Gabriel said she asked the dealer to contact the lender to explain why she stopped making payments. But once she started receiving phone calls from creditors, she realized she was the one who had to discuss it with the lender.

She negotiated a plan to extend the length of her loan to make up for her missed payments. Her Jeep sits immobile in her driveway while she putters around in a used $1,600 Buick that she purchased with help from her father. She is trying to save money to get the Jeep fixed.

"I definitely think that the bank that I'm working with is definitely fair," San Gabriel said. "If somebody borrowed money from me, I'd definitely expect them to pay it."

If you're at risk of defaulting or being repossessed: At a recent bankruptcy clinic in Falls Church, Va., lawyer Nancy Ryan distributed a handout titled "Can I Keep My Car?"

The short answer: It's getting tougher.

"They're getting more aggressive with the cars now," she told the class. "They want everyone to be on the hook for the full amount of the loan."

According to Edmunds.com, about 1.6 million autos will be repossessed this year, about a 10 percent growth over last year. Financial experts said that it is possible to bounce back from repossession or even bankruptcy, but it requires kicking bad spending habits and perhaps a change in lifestyle. Credit-reporting agency Equifax said it takes seven to 10 years for a bankruptcy or collection to be removed from your credit report.

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