Conventional wisdom holds that a vehicle is the second largest purchase in the lives of most Americans. For consumers who have yet to buy a house or may never buy a house, purchasing a vehicle probably springboards to the top of the list.
Either way, a vehicle represents a significant investment and the loss of that vehicle can have serious consequences for any household. As the economy continues to struggle and household incomes are jeopardized, making those monthly car payments can be a challenge.
What is a borrower to do when faced with an income setback that puts fulfilling the terms of a vehicle loan in doubt? Be proactive.
Loan delinquencies increasingAccording to Experian Automotive, third-quarter 30-day delinquencies rose from 2.55 percent in 2007 to 2.76 percent in 2008 -- an increase of 8.1 percent. Likewise, 60-day delinquencies posted a 12.7 percent jump during the same quarter of 2008 over 2007. Repossessions are also on the rise. The American Bankers Association reports that for the same reporting period, repossessions on indirect auto loans -- loans made by dealers or other third parties -- went from 1.82 per 1,000 outstanding loans in 2007 to 2.7 per 1,000 in 2008, a rise of approximately 48 percent. This is a continuation of an upward trend that began in 2006. The year-over-year projections are also grim. Thomas Webb, chief economist for Atlanta-based automotive auction group Manheim, says approximately 1.67 million vehicles were repossessed in 2008, and that he expects about a 5 percent increase in repossessions in 2009, to a total of roughly 1.75 million vehicles.
Banks, credit unions and manufacturers' captive finance companies are all under pressure to minimize delinquencies and hold the line on repossessions. Although a fairly efficient system is in place to get repossessions off a creditor's books through auctions and other wholesale avenues, the American Financial Services Association, or AFSA, reports that each repossession represents an approximate $8,000 loss to the creditor. Consequently, repossession is considered a last resort. "It's not in our interest to go and repossess a car," says Justin Leach of Toyota Financial Services, or TFS.
This is a sentiment shared by many vehicle finance companies. How, then, can borrowers in crisis and lenders find a way to keep those borrowers in their cars and current on their payments?
Case-by-caseMost vehicle finance companies work with troubled borrowers on a case-by-case basis and each has its own formula for working with delinquent borrowers. Some, such as TFS and Hyundai Motors Finance Company, or HMFC, are more open about how their evaluation process works and what solutions might be considered. Others, such as GMAC, guard their procedures with the tenacity of the Colonel protecting the identity of his 11 secret herbs and spices. Mike Stoller of GMAC explains, "There is no formula for public consumption. Each case is unique and each solution set is tailored."
But there is some common ground. Borrowers who may face payment problems should read the AFSA white paper Vehicle Repossession Prevention: Steps Taken by Industry, published in July 2008, which explains a number of possible solutions.
- Refinancing the loan -- With today's low interest rates, refinancing the entire loan -- perhaps with a longer term -- could lower monthly payments enough to make them easier to handle.
- Modifying the terms of the loan -- Anytime you change the interest rate or the term of the loan, it affects the monthly payment. If you have 24 months left to pay on your car, asking for the term to be extended to 30 months can lower your payment significantly. True, you may have to pay a little for the change and it's likely to cost you more interest money over the long run, but it's better than losing your car and your credit rating.
- Changing the payment due date -- Sometimes getting your payment due date scheduled so as to better comply with the timing of your paychecks can make it easier for you to make on-time payments.
- Deferring payments -- If you always seem to be one payment behind, try contacting your lender and asking to defer a payment. The lender may allow you to skip one payment and just add it on to the back end of your contract -- so that a 48-month loan actually takes you 49 months to pay off. The one-month break could get you back on track.
- Extending payments -- If you're just in a temporary bind, the lender may agree to give you an extension on the date to make the payment -- by pushing it back a few days or weeks and then returning to the normal payment schedule.
- Waiving late charges -- The accumulation of late charges in some cases can be the difference in your ability to make the payment or not. Lenders don't really want to repossess your car and it may be a concession they're happy to make if you can show them the waiver can get you back on a regular payment schedule.
Steve Parrett of Nissan Motors Acceptance Corporation says Nissan often is willing to skip a payment and add it to the back end of the loan. No partial payment would be required, but the interest for any deferred payments would accrue. Meredith Libbey at Ford Motor Credit says contract extensions to qualified customers are its most common approach. "In light of today's economic turbulence, NMAC is providing more customers with payment extensions than normal," Parrett says.
Chase Auto Finance also lists extensions first among the three most common solutions it uses, according to spokeswoman Mary Kay Bean. The other two are rewriting the contract when the borrower faces extenuating circumstances such as critical illness, and, in a few situations, settlements. This usually occurs when a customer finds a buyer willing to pay more than the vehicle's wholesale value but less than the amount owed Chase.
Rewriting the loan is the favored approach at BMW Financial Services, according to Martha McKinley who says, "The major tool would be to refinance, extend the term of the loan and lower the payments." Mike Buckingham, president of HMFC says they have gone as far as to work with dealers to get struggling borrowers out of their current vehicle and into a more affordable one, thereby lowering the monthly payment.
Any number of life changes can disrupt a borrower's ability to keep a vehicle loan current. Changes in employment, prolonged illness and natural disasters are the more common causes of loan delinquency and the ones most often cited by vehicle finance companies. Regardless of the reason, a critical point is that the earlier a borrower contacts the creditor, the more likely an arrangement can be made.
Without customer contact, according to the white paper, vehicle finance companies do not know whether a borrower is struggling or engaged in fraud. "Communicate with your lender openly, honestly and quickly," says Buckingham.
Even if the account is current but the borrower sees trouble on the horizon, Leach says, "Call your creditor. So many people are afraid to talk to their creditors. If the customer calls us without us looking for them, it makes a big difference."
Borrowers wishing to discuss their circumstances and possible solutions with their vehicle finance company should be able to find a contact number on their most recent statement. Below is the contact information for 16 high-volume auto lenders:
16 high-volume auto lenders