Economic Data: Car Loans May Be Debt Concern for Economy

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New FFN Quarterly Comment: Automobile loans pose a worry for overall rate of consumer debt

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Higher auto loan amounts and more auto loan defaults offer a worrisome window into the new face of consumer borrowing.

Automobile sales appear to be on track for a record-setting year, but higher loan amounts and more auto loan defaults offer a worrisome window into the new face of consumer borrowing, according to the Freedom Financial Network Quarterly Comment on consumer debt and credit issues.

“During the Great Recession several years ago, many people lost access to some of their credit. Since then, many people have accumulated more modest quantities of revolving debt,” said Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network (FFN). “Yet debt is still a problem. Non-revolving debt is accumulating twice as fast as revolving debt, and people are unable to repay some of this debt.”

This quarter, total consumer debt continued to increase, and non-revolving debt – which includes debt for vehicles and education – outpaced revolving debt, such as credit cards. In fact, during the past five years, vehicle and student loans grew by 42 percent, while revolving debt increased just 15 percent, according to an analysis of Federal Reserve debt data. projects a record-setting year, with 17.2 million new vehicle sales in 2016. But a report from Experian indicates that nearly one-third of current auto loans are subprime. Subprime auto loans have longer terms, up to eight years, and subprime borrowers pay an average interest rate of 10.4 percent, compared to a rate of about 3 percent for prime borrowers. At an average new vehicle price of more than $33,000, subprime borrowers would pay almost $10,000 more in total interest, and have monthly payments more than $100 higher than prime borrowers, for a seven-year loan.

Some of those loans will never be repaid, if a new report from credit rating company DBRS Inc. is correct. The company projects that 18 percent of last year’s subprime vehicle loans will go into default, higher than the 12-14 percent of loans that went into default in the past two years.

“The difference between a prime and subprime car loan can have a significant impact on a person’s month-to-month budget and long-term financial stability,” added Andrew Housser, Freedom FFN co-founder and CEO. “What looks like a good monthly deal can wind up absorbing a tremendous amount of income. That, in turn, can lead to difficulty paying other monthly expenses, which can result in higher overall debt and, in severe cases, defaulting on the auto loan or on other debt.”

Freedom Financial Network observes several economic indicators closely and provides consumer education in its work to help consumers get out of debt and stay out of debt.

Recent financial data as reported:

1. Non-revolving debt continues to outpace revolving debt. In July (the most recent data available), total outstanding consumer credit rose by 5.8 percent, to a total projected $3.661 trillion, excluding mortgage debt. Outstanding debt has hit a new high each of the past 56 consecutive months. In July, the growth of non-revolving debt (debt for items such as vehicles and education, as well as unsecured installment loans) continued to outpace the growth of revolving debt (primarily credit cards). Non-revolving debt grew by 6.7 percent, while revolving debt increased half as quickly, by 3.4 percent.

2. Personal income continues upward trend. In July (the most recent data available), personal income increased for the fifth consecutive quarter, by $71.6 billion, or 0.4 percent. Disposable personal income increased by 0.4 percent, or $60.1 billion, and personal spending increased by a modest 0.3 percent.

3. Personal savings rate declines. In the second quarter of 2016, consumers saved 5.7 percent of their personal disposable income. This rate is higher than rates in the spring, but it is lower than rates during the past three quarters.

4. Unemployment remains level; more than half a million discouraged workers. In August, U.S. unemployment remained the same as the previous month, at 4.9 percent. However, 7.8 million people were employed part-time, but wanted to work full-time or were “marginally attached” to the labor force. People who are marginally attached have looked for a job in the past 12 months but have not found one. Among this group, 576,000 people were discouraged workers, which means they have quit looking for work because they believe no work is available for them.

The FFN Quarterly Comment pulls together significant statistical releases and provides quarterly comment on timely debt and credit issues that matter to consumers. To schedule an interview with Andrew Housser, contact Aimee Bennett at 303-843-9840 or aimee(at)faganbusinesscommunications(dot)com.

Freedom Financial Network (
Freedom Financial Network, LLC (FFN), provides comprehensive consumer credit advocacy services. Through the FFN family of companies – Freedom Debt Relief, ConsolidationPlus, FreedomPlus and – FFN works as an independent advocate to provide comprehensive financial solutions, including debt consolidation and debt negotiation (settlement) services for consumers struggling with debt. The company, which has resolved more than $5 billion in debt and assisted more than 300,000 clients since 2002, is an accredited member of the American Fair Credit Council, and a platinum member of the International Association of Professional Debt Arbitrators.

Based in San Mateo, California, FFN also operates an office in Tempe, Arizona. The company, with 1,200 employees, was voted one of the best places to work in the San Francisco Bay area in 2008, 2009, 2012, 2013 and 2014, and in the Phoenix area in 2008, 2009, 2010, 2012, 2013, 2014 and 2015. FFN’s founders are recipients of the Northern California Ernst & Young Entrepreneur of the Year Award.

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