To live and work in much of the United States, access to a car is virtually a requirement. Jobs, shops, doctors, and daycare are often unreachable by transit, and too far by foot or bike. Owning a car, the research shows, means your life is likely to be more stable and your bank account more flush.
Unless you're among the growing number of Americans who own a car that they can't afford, and who are now drowning in the debt.
A trio of new reports paint an increasingly troubling picture of the auto loan landscape. First up: According to new numbers from the Federal Reserve Bank of New York, a record seven million Americans are at least three months behind on their car loan payments. That's about a million more than there were in 2009, the end of the last recession.
As a share of total auto loans, delinquencies aren't quite as bad as the peak in 2010, when households were feeling the most acute effects of the tanking economy. Their growth is generally commensurate with the expansion of auto loan market in general: By summer 2018, Americans owed $1.26 trillion on their cars, an increase of 75 percent from the end of 2009. (To understand the geography of this issue, see CityLab's story about mapping auto debt from 2018.)
But a growing number of borrowers defaulting on their car loans is a signal of serious financial duress for those households, experts say: Because cars are so essential, Americans traditionally prioritize paying off these loans ahead of others. Steve Eisman, the hedge fund manager made famous in the book and film The Big Short by cashing in on badly designed mortgages he spotted before the recession, told the Financial Times in 2017 that auto loans generally held up well better than mortgages in those years because consumers "tended to default on their house first, credit card second and car third."
When more households fail to make payments on their vehicle, that implies that they're not financially healthy enough to maintain a grip on even their most important asset. That, in turn, seems to point to an underlying persistent effect of economic inequality: Too few people are sharing the benefits of an ostensibly healthy economy in which unemployment is low and markets are strong. Wages are stagnant, living costs are rising, and many Americans are digging their way out of still other forms of debt, such as student loans.
Further complicating this scene, a host of new automotive financing options are fundamentally predatory, and many Americans who are now literally driving into debt are the least able to shoulder it. High-interest subprime loans aimed at purchasers with low income and poor credit scores made up as much as 26 percent of all auto loans issued in 2016, up from 14 percent in 2009.
Another new paper by the U.S. Public Interest Research Group explains the history of this familiar-sounding form of lending, which is structurally similar to the subprime home loans that crashed the economy in 2008:
Increasing investor demand for high-yield bonds was among the factors that led lenders to loosen lending standards for car loans. From 2011 through mid-2016, more banks loosened credit standards for auto loans than strengthened them, making it easier for borrowers to qualify for loans.
Some lenders have also engaged in questionable lending practices reminiscent of mortgage lending trends leading up to the 2008 housing market crash, including extending loans to consumers without full consideration of their ability to pay. To find more borrowers whose debt could be bundled into securities and sold on the stock market in high-risk, high-profit bundles, some lending institutions became lax.
Auto finance companies, such as Santander Consumer U.S.A. Holdings Inc., are issuing the bulk of delinquent loans, the Fed notes. Compared to banks and credit unions, they're less likely to check to make sure a person is in good financial standing when underwriting car purchases. In 2017, Moody's found that Santander verified the income of borrowers on only 8 percent of the auto loans it wrapped into $1 billion worth of bonds it sold to investors.
In some states, chip technology has streamlined the efficiency of a market that feeds on low-income borrowers: Cars can be equipped with GPS locators to ping repossessors when payments are past due. Meanwhile, it's getting easier for auto lenders and dealers to shake down vulnerable borrowers. Last April, the Trump administration rolled back Obama-era auto consumer protections aimed at keeping minorities from being charged higher interest rates on loans.
In terms of societal-scale effects, the upswell in auto loans—prime, non-prime, and subprime—don't worry analysts as much as, say, the badly designed mortgages that triggered the Great Recession. The market for car loans is just a fraction of the size of the one for houses. "This isn't going to be the next 2008," said R.J. Cross, a policy analyst at the Frontier Group, a research think tank that co-authored the U.S. PIRG report. But these trends still spell trouble for individuals and families, and point to an enlarged economy pumped full of bad loans.
By increasing access to cars, lax financing standards also appear to be contributing to a national rise in driving, and, with it, declining public transit ridership. In the latest edition of its biennial survey of who's riding buses and trains in U.S. cities, Transit Center, a public transportation research and advocacy group out of New York, notes that the share of households without vehicles fell 30 percent between 2000 and 2015, with foreign-born residents, who are more likely to earn lower incomes and ride transit, posting even sharper declines.
In the survey, respondents who reported decreasing their bus and train use overwhelmingly replaced transit with private cars. And almost half of respondents who said they'd purchased a car over the past two years received a loan to finance it. Of those, 56 percent said that getting a loan "was easier than they had expected."
Of course, improved car access among lower-income groups might look to be a positive trend on its face, since a personal vehicle can equate opportunity. So strong is the historic link between car ownership and household income that a trio of transportation equity scholars recently called for subsidizing access to wheels for poor Americans. But fewer rides made by public transportation and more by private automobile is a trend with consequences that transcend the U.S. economy: It feeds the planet's existential problem of rising carbon emissions, especially since SUV and truck sales have become particularly popular during this auto-loan boom. "The rise in auto debt is evidence that we're dependent on cars in an unsustainable way," Cross said.
The new high-water line of defaulted auto loans also suggests that personal vehicles aren't always golden tickets. Instead, for Americans living paycheck to paycheck, they're a catch-22: If you don't have the money and can't buy a car, you'll struggle to make ends meet. And if you don't have the money, but still buy a car, you're liable to fall even further behind. Vehicles may be the table stakes for playing in the U.S. economy, but in so many ways, it's getting harder to win.