From Foreclosure Signs to Auto Repo Lots
Monday, February 18, 2008
Reina Bolanos got a loan for her used Honda Odyssey in 2006 on what appeared to be favorable terms: $16,000 without a down payment. Though the 8 percent rate was high, Bank of America offered to spread the loan over six years to keep the monthly payments down.
But the secretary from Silver Spring found that raising her young children cost more than she had expected, and she now worries about losing the car after missing her last two payments.
A growing number of Americans are buckling under the weight of debt as the troubles that started among homeowners with subprime mortgages last year spread to other consumers who rely on credit. Auto loan borrowers are having an especially hard time. The number of people more than 60 days late on their car payments has spiked to a 10-year high, according to Fitch Ratings.
Similar problems are brewing for credit card holders. Card balances written off as uncollectible by banks have jumped 24 percent, and late payments are up 16 percent from a year ago.
Like the mortgage market, consumer credit boomed in recent years as lending standards loosened. Unorthodox auto loans lured consumers to buy cars they otherwise couldn't afford. Credit cards teased holders with introductory rates that soared after a few months. Now, more people are struggling to keep up with their bills under the strain of growing job losses and an economic downturn.
Bolanos, 27, has been using her credit card to pay utility bills and buy groceries, even though the card is nearly maxed out. She's racked up $5,000 in credit card debt. With monthly car payments of $400, $1,335 in rent for her two-bedroom apartment and sizable day-care bills, she's overwhelmed. She and her husband, a construction worker, earn a combined $50,000.
"It's just so stressful," Bolanos said. "To be young and to have a family going through this, it's hard."
Consumers borrow more money today than at any point in history, and they are increasingly using credit to pay for nearly everything, from cars to groceries to electricity. Consumer debt reached an all-time high of $2.55 trillion in December, nearly double from a decade ago, according to the Federal Reserve. Some economists say Americans are simply paying the price of their addiction to debt and are now more vulnerable than ever to credit downturns.
Behind the rising defaults is a tale of two Americas. Those with good credit will almost certainly see lower rates on cars and credit cards as the Fed continues to cut rates this year. But those with bad credit are facing rising rates and being forced to put more money down on cars. Some may not be able to get a credit card or auto loan as banks, spooked by the mortgage mess, have been reassessing the risk of making loans.
"It's going to be much more difficult for those people who are already in credit distress than it is for those of us who are fortunate and have full-time jobs," said Tony Cherin, a finance professor at San Diego State University.
But others worry that even those with good credit will share in the pain. The financial woes that started among homeowners with questionable credit histories -- the "subprime" borrower -- have sparked a downturn in the housing market.
"It's not only people who are stuck with the subprime mortgages. It's your average American," said Todd Cook, president of Debt.com, which refers financially stressed people to firms that can help them. "It started with mortgages, but it's spilling over. If it's not their homes, it's their credit cards. If it's not their credit cards, it's their autos."