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How bad is auto loan debt?

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The American love affair with the automobile isn’t over, but it is seriously strained.

Auto sales are down as consumers try to stretch their dollars to cover the rising prices on food, goods and gas. But late payments and repossessions have increased.

In the first quarter of this year, almost one in 25 car buyers was behind at least one month on the payments, according to statistics from Moody’s and Equifax. That means there are more auto borrowers in trouble today than during the recession of 2001 and 2002, says Scott Hoyt, senior director of consumer economics for Moody’s

Defaults and repossessions are at an all-time high: 3.4 percent, according to the data. But while the situation looks bleak, “it’s still not as bad as the mortgage” sector, says Hoyt.

Similar to homebuyers, auto buyers have been making lower down payments. The average amount buyers put down on a car decreased from 6 percent in 2006 to 5 percent in 2007, according to numbers from Standard & Poor’s.

Another phenomenon that’s impacting some of those payment books: negative equity.

A number of buyers are wrapping old auto debt into their new car loans. As a result, they drive off the lot owing thousands more than their new rides are worth. And that’s before depreciation.

While the idea often seems like a way out, it can create a financial cycle that’s difficult to break: the overage of several back loans wrapped into one current note with sky-high payments. Selling the car, or even giving it back, won’t clean the slate.

What is the end result when all these economic factors collide? More cars are staying on the lot.

“Banks don’t want to loan,” says David Wyss, chief economist for Standard & Poor’s. “And most people don’t want to borrow. We’re beginning to see car sales slowing down dramatically.”

Written by
Dana Dratch
Personal Finance Writer
Dana Dratch is a personal finance and lifestyle writer who enjoys talking all things money and credit. With a degree in English and writing, she likes asking the questions everyone would ask if they could and sharing the answers — along with smart money management tips from the experts.