It’s not just homes that are being taken away these days — cars are also being repossessed at startling rates.

Today’s all-too-frequent recipe for hard times — resetting mortgages, increasing foreclosures, declining home prices and soaring prices for food and fuel — is now peppered with increasing numbers of consumers falling behind on car payments.

Thomas Webb, chief economist at Manheim Consulting, a wholesale vehicle auction operator, says 1,505,000 vehicles were repossessed in 2007, a 10 percent increase over 2006. He predicts another 10 percent increase in repossessions during 2008, sending repo numbers to one of the highest levels in a decade.

As repo figures climb, auction wholesalers and dealers are buying used cars at significant discounts and frequently passing those savings on to consumers, says Webb.

Wells Fargo reports it has also seen an increase in auto loan delinquencies and wrote off $1 billion in auto loans in 2007, an almost 17 percent increase over the $857 million in write-offs in 2006. An even higher write-off rate is expected this year. As with subprime home loans, low interest rates over the past few years made it easy for people to buy cars they ultimately couldn’t afford. Between 1998 and 2008, the total of Americans’ auto loan balances jumped from $282 billion to $772 billion.

Fast facts
1. Car repos rose 10 percent in 2007 — a similar jump is expected in 2008.
2. Much higher used car inventories are pressuring resale prices lower.
3. So far this year, used vehicle sales have dropped by about 7 percent.
4. The
current national average rate for a 36-month used car loan is 7.16 percent.

The 2007 Non-Prime Auto Financing Survey published by the National Automobile Finance Association revealed that delinquencies on subprime auto loans jumped from 6.8 percent to 11.6 percent.

Tom Kontos, chief economist for vehicle auction operator ADESA, said ADESA’s normal 45-day inventory rose to a 55-day inventory in January 2008. Some of that has since eased, but Kontos says there have been abnormally high levels of vehicles on the auction block.

“Some of it we anticipated in tough economic times, but the spillover from the housing market may make this a little out of the ordinary. The increased number of repossessions in the first part of 2008 was greater than we expected,” says Kontos.

While resetting mortgages may be driving some of the problems in late car payments, Mari Adam, president of Adam Financial Associates Inc., of Boca Raton, Fla., says the problem is compounded by the fact that Americans have a bad habit of buying vehicles they can’t afford. Adam says she sees many clients overspend on vehicle expenses — sometimes spending as much as 40 percent of their income on vehicles, when even 20 percent can be too much.

“The bill is coming due for a lot of people who were living large. Whether it’s the house, the car, the credit cards or anything else, it’s a problem. You have to remind people that a car is a depreciating asset and you can’t overspend on it,” says Adam.

An easy credit market in recent years and dealers anxious to find creative ways of helping consumers buy vehicles they couldn’t afford also share in the blame, says Philip Reed, senior consumer advice editor at
Edmunds.com. Reed says many drivers have discovered their leases are too long or that they’ve leased too much vehicle.

What you can do
If you’re having trouble meeting your car payments — or think you will in the near future — there are things you can do before you mail in the keys or watch the tow truck haul your wheels away:

  1. Sell and downsize.
  2. Renegotiate loan terms.
  3. Refinance.

People who bought with traditional financing have more options, assuming that they are not upside down on their loans.

Even though it is a depreciating asset, those with a fair amount of equity in the vehicle may be able to sell and downsize, thus eliminating their car payment and even creating some surplus cash. For example, consider a vehicle valued at $18,000 with a $10,000 balance remaining with monthly installments for 36 months at 6 percent.

Selling the vehicle and paying off the loan would free up $322 per month and bring in $8,000, which could be used to buy a cheaper used car or possibly used for other purposes, if the household can get by on one vehicle.

“If you have some equity in the vehicle, then you do have some freedom to make positive changes to your economic picture. (Lenders) would rather not repossess your vehicle and they have options for you,” says Reed.

No matter what kind of situation the vehicle owner is in, Reed recommends talking with the lender and explaining the situation. Besides selling the car or downsizing, owners may be able to turn to their lender to reconfigure the loan, perhaps by extending the term. If your lender isn’t willing to renegotiate the existing loan, look to other lenders to for a new loan — at terms better suited to your needs — and pay off the existing loan. Use
Bankrate’s auto loan rate search to find national averages and rates in your area.

Typically, if a consumer misses three payments and will not communicate with the lender, a repossession order is put in place. Even while missing payments, Reed says, drivers can at least temporarily delay a repo by simply communicating with the lender.

“They just want to know that you’re not going to disappear on them and close down completely. Repossession is a negative financial situation for them as well because they have to pay to have it repossessed and then they have to pay auction fees,” says Reed.

Adam says that when people are trapped between a high car payment and resetting mortgage, the worst thing they can do is to simply skip vehicle payments and risk repossession. The effects go beyond simply losing the vehicle — a repossession can have a very negative impact on a person’s credit rating. And in a time of tight credit and increasing lending standards, that can affect a person’s ability to get another vehicle.

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“Defaulting on a car nowadays, with credit scores having the importance that they have, has huge consequences. It can even affect your insurance and your ability to get a job in some cases,” says Adam.

Similar to the housing market, one person’s misfortune is another’s opportunity. An increased number of repossessions are creating some great deals in the used vehicle market and, Webb says, wholesale used vehicle prices have been down substantially.

Used vehicle sales across North America in the first three months of 2008 fell by 7 percent from a year earlier, the Bank of Novia Scotia says in it Global Auto Report, with one-year-old models dropping 11 percent. The bank says it expects used-car prices to “soften” through early 2009.

The Black Book, a guide to used vehicle prices, has reported that prices of premium used cars fell by 20 percent to 22 percent since March 2007 and CNW Marketing Research says used sport utility vehicle sales in March were down 14 percent compared to last year.

At ADESA, says Kontos, not only are used vehicles coming at a cheaper price, but repossessed cars tend to be newer and in better condition. In the past, repossessed cars tended to be five to seven years old when taken back and they usually were purchased used by someone who was already a credit risk. But under current economic conditions, many of those cars being repossessed today and the owners they are being taken from don’t fit the typical mold.

“I think there are a lot more gems out there now,” says Kontos.

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