Car loans in difficulty: has the symbol of freedom become a drag?

Few things are more strongly associated with a particularly American style of freedom than the private automobile. Whether it’s Super Bowl ads or public policies that disproportionately favor motorists over cyclists and transit users, the message has been consistent for decades: get out and drive.

But the freedom of the open road comes at a growing cost: A report last week from the Federal Reserve Bank of New York notes that auto loan delinquencies older than 90 days have been on the rise since 2012, trapping a record 7. millions of Americans. Since the global financial crisis 10 years ago, the amount Americans owe on their cars has increased by 75%. Even though some Americans drive less or give up their cars altogether, for many commuters, a car is an expensive but overwhelming necessity.

This is the case of single mother Jennifer Ramsey in Tucker County, West Virginia. A car is not a status symbol but a life support system, and Mrs. Ramsey has just gotten hers back after a divorce. “Over here,” she said, “no car, no job. No food.”

Why we wrote this

For many, cars still symbolize open-road mobility that is part of the American dream. But the growing financial burden of owning a car can change that.

For Jennifer Ramsey and her fellow citizens in Tucker County, West Virginia, a car is not a status symbol, but a life support system.

“Over here,” she said, “no car, no job. No food.”

Ms. Ramsey says that with no transit in the county, if you don’t have a working car, “you have to be really creative and you have to be really humble.

Why we wrote this

For many, cars still symbolize open-road mobility that is part of the American dream. But the growing financial burden of owning a car can change that.

“It’s common to see people going to the grocery store with their riding mower or motorized scooter,” she says. “It’s a very convenient solution for getting around where you can’t own a vehicle due to your finances or a disability. “

Ms Ramsey, a single mom, understands the dangers of being stuck without a car in a place that depends on them. His silver 2012 Mazda 5 recently emerged from a two-year legal vacuum after his divorce. In the meantime, she lost her union job as a carpenter working on cooling towers, unable to make the 90-minute commute. “It’s actually put on most job applications here,” she said. “’Do you have a reliable vehicle? “”

As Mrs. Ramsey’s experience indicates, America vaunted freedom hitting the road in a private automobile comes with a heavy financial obligation, which many Americans find increasingly difficult to meet.

A recent consumer debt report by the Federal Reserve Bank of New York notes that auto loan delinquencies older than 90 days have been on the rise since 2012, hitting a record high 7 million Americans. The report also finds an increase in overall auto debt, up 75% since the Great Recession. Collectively, Americans owe a record $ 1.28 trillion on their cars.

The rapid growth in auto loan debt highlights a growing contradiction in the U.S. economy: Car ownership remains a necessity in most places, but for many workers, car prices are rising faster than wages. Added to this record is the rise of “subprime” auto loans, which carry high interest rates and often expose borrowers to an undue risk of default from the outset.

For many Americans, owning a car is both cumbersome and mandatory. Some analysts argue that the solution is not to increase the number of cars – there are a staggering 272 million private cars at the last count, one for every 1.2 Americans. The solution, they say, is to reduce the number of “transit deserts,” where alternatives are lacking, while cracking down on predatory lending.

“The way we’ve become such a car-centric nation is really the result of decades of politics that have gotten us to this point,” says RJ Cross, analyst at the Frontier Group, a public policy think tank. “Our cities are designed so that everyone feels obligated to own a car. “

Reinforced by everything from zoning codes that push workers in the suburbs to public spending that favors highways over public transit, sidewalks and bike lanes, this mentality is pushing Americans into more debt, says Ms. Cross. . She is the main author of Get into debt, a report released in February that calls for greater legal protection against predatory lending and for better public transport.

“It’s in the best interests of these automakers to get as many people in the cars as possible,” she says. “So the fact that they are able to have these huge funding arms to help accomplish this, and the fact that they historically tend to capture the market that has lower credit scores, is deeply troubling. “

Are cars no longer a burden, but also a necessity?

Auto loans are almost as old as the mass-produced automobile itself. In 1919, just 11 years after the release of the first Model T, Ford’s competitor founded the General Motors Acceptance Corporation, which offered customers a way to buy a car on credit. GMAC helped propel GM to the forefront of the nascent American auto industry, and by 1930, 3 out of 4 cars were purchased with a loan.

Today, the freedom to drive a car out of the parking lot with little or no upfront money often comes with a sense of trapping. Almost half of Americans say their auto debt has stole their peace of mind, and nearly a third say showing up naked for work would be less stressful than five years of car payment.

But for many Americans, it’s because these payments are necessary to get to work, naked or not, in the first place.

“We have transit deserts in every big city“says Junfeng Jiao, professor of urban planning at the University of Texas at the Austin School of Architecture.” This is something we have to face.

According to statistics from the Bureau of Transportation, transportation is the fourth highest expense of U.S. households, after health care, shelter and food. And the average price of new cars in the United States now exceeds $ 36,000, an 8% increase over the past 10 years, adjusted for inflation. In comparison, household incomes grew only 3% in the decade ending in 2017, the last for which the Census Bureau provides data.

And holding onto these cars has become a priority. In the past, debtors facing financial difficulties traditionally paid their mortgage first, then their car payment, and finally their credit card bill. But in a 2012 survey, TransUnion found that more struggling borrowers started paying for the car first.

Many Americans, of course, continue to love the freedom of mobility that a car offers and have no difficulty with making payments. Yet the rise in debt and delinquency signals a widespread problem which, ironically, can be attributed in part to legislation designed to avert another financial crisis or subprime loans. An exemption from the Dodd-Frank Act of 2010 prohibits the Consumer Financial Protection Bureau from regulating car dealerships.

After the Great Recession, loans to subprime clients doubled by 2014, while loans to senior customers have increased by half.

Some populations are more vulnerable than others to the challenges of subprime lending and live in transit deserts.

“African-American households have been particularly affected by the [global financial crisis], and face continued discrimination in the auto loan market, ”said Melissa Jacoby, bankruptcy expert at the University of North Carolina, in an email interview.

And she sees a significant risk that bad debts could harm the economy at large. This is because loans have characteristics that are prone to default, and because of how a wave of defaults can spill over into the markets for loan-backed securities.

“Many American households have not recovered from the impact of this [2008] crisis, and yet market participants seem to be adopting the same risky behavior that precipitated it, ”says Professor Jacoby.

The road ahead

A cultural shift, however, could help ease tensions over car ownership. Over the past decade, the number of kilometers traveled each year by the average American, an upward trend for the past 60 years, has been steadily declining. This trend is driven by those between 16 and 34 years old, a population known to be much less focused on the automobile than its ancestors.

“We may just not be as interested in inheriting the same kind of American dream involving car ownership as previous generations,” says Ms. Cross, who sold her car after moving from Kansas to Boston. .

As a result, per capita auto debt has grown fastest among Americans 70 and older, and slowest among adults under 30, although young people are still more likely to be delinquent, according to the New York Fed report.

Like Ms Cross, Dylan Casler, a recent Vanderbilt University graduate who moved to Boston last year, found that the costs of owning a car in Boston outweighed the benefits. “Repairs would become expensive. Insurance was expensive. I have found my windshield cracked pretty much every year, ”he says of his 2004 blue Saab 9-3, which he is selling. “It’s good to save all the money I put into it. “

Editor’s Note: A sentence in this article has been corrected to state that the United States has one car for 1.2 people.

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