Running on Empty
Delinquent Auto Loans Are on the Rise as More Borrowers Drown in Debt

By Ylan Q. Mui
Washington Post Staff Writer
Sunday, April 20, 2008

The phone started ringing as soon as Paula San Gabriel of Bowie missed her first car payment.

The 23-year-old college student bought a used Jeep Grand Cherokee in 2005 for $20,000. Gold with leather interior, it was the perfect car for cruising around with her friends. San Gabriel put down $1,000 and financed the rest under the easy lending standards that once seemed ubiquitous: 9 percent interest with $400 monthly payments spread over six years.

The ride was smooth until San Gabriel hit a road bump in January 2006. The engine broke down, and her warranty had expired. Fixing her car could cost as much as $5,000 -- money she could not spare considering the size of her car note. Driven partly by financial crisis and partly by sheer frustration, San Gabriel stopped making her payments the next month. And the creditors started calling.

"I know the banks don't play," she said. "If you're missing $5 and you're a day late, they report that stuff."

The turmoil that has roiled the housing market is also making waves in the auto loan industry. Although auto loans have fixed interest rates -- compared with the adjustable mortgage rates that have pummeled homeowners -- many consumers are finding that they have taken on more debt than they can handle to purchase their cars as well.

Delinquencies on indirect auto loans, which are made through a third party and constitute roughly 90 percent of car loans, reached more than 3 percent in the fourth quarter of last year, the highest rate in at least 17 years, according to the American Bankers Association. Delinquencies are defined as payments that are more than 30 days past due.

The reasons for that rapid rise are varied, and anecdotal evidence suggests that the delinquencies affect a broad swath of economic classes. Some are the result of homeowners with ballooning mortgages making tough decisions about which bills they can afford to pay. Other car owners succumbed to repayment plans of as long as seven years, compared with the traditional maximum of five years. As a result, Edmunds.com estimates, more than a quarter of auto loans are "upside down," meaning the borrower owes more than the car is worth. The average negative equity was $4,305.05 in March, up 32 percent from March 2002.

"The auto industry is not exempt from the current stress that's out there in the economy," said Carol Kaplan, spokeswoman for the ABA. "If you're going through it right now, you're not alone."

The worst thing to do if you find yourself in trouble is to ignore it, according to lenders and financial advisers. Whether you're in danger of missing a payment or you're so far behind that repossessors are knocking on your door, the first step toward resolving the problem is to come clean. Call your lender and discuss your options -- you may have more than you think.

"Yes, you can recover," said Philip Reed, consumer advice editor at Edmunds.com. "But essentially what you need to do is . . . start again building your credit up. . . . It does take quite a while."

If you know you're going to miss a payment . . .

Lenders suggest that you call them as soon as your bills start making you nervous. Americans Well-Informed on Automobile Retailing Economics (AWARE), an industry trade group that includes the American Financial Services Association and the National Automobile Dealers Association, said warning signs include avoiding looking at bills and difficulty saving money.

Consumers should also realize that although they may have signed the paperwork for the loan at the car dealership, the transaction is financed by a third-party lending institution. Toyota Financial Services, Ford Credit, Chrysler Financial and GMAC Financial Services are among the largest. Check your paperwork to find out whom to call. There is no penalty for giving them a heads-up.

"Overall, people are reluctant to face up to money issues -- whether that's what your credit card interest rate is or if you're finding you're falling behind on your auto payment," said Eric Hoffman, spokesman for AWARE. "Sweeping it under the rug is not going to make it go away."

GMAC said it will work with borrowers when they get behind and three years ago launched a Web site called SmartEdge to educate consumers on auto financing. Spokesman Michael Stoller said the company tightened underwriting standards three times last year to require larger down payments from borrowers with lower credit scores to safeguard both the company and consumers.

"We don't want anybody to get in over their head," he said. At the same time, "we're protecting ourselves from a business perspective as well."

Creditors may be more lenient when you have a strong payment history backing you up. In addition, let them know if the situation is temporary -- a one-time budgetary hit from a hospital stay, for example. They may be willing to give you a grace period to pay your bills or even defer them for a few months.

"Chances are in this environment, if you have a reasonably average credit rating, most lenders are going to be more than willing to work with you," said Jack Gillis, spokesman for the Consumer Federation of America. "A skipped payment can impact your credit rating as well as make it more difficult to negotiate a new plan later on."

If you've already missed a payment (or more) . . .

On a recent afternoon, more than a dozen people gathered at Legal Services of Northern Virginia in Falls Church for free advice on filing for bankruptcy. Many were in danger of losing their homes, and for some, their cars were not far behind.

One of the women attending the workshop was a 54-year-old stay-at-home mom from Reston who spoke on condition of anonymity because she was applying for jobs. She said she fell into a financial black hole after she and her husband divorced about two years ago. She has been living off money she received from him for her share of the family home, along with about $360 a month in child support for their two kids, but funds are running out.

She was able to eke out her $615 payment for the lease on her Toyota Highlander Hybrid in January but missed the next two months. She sent her lender another check for part of the amount in April "hoping that would call the dogs off," she said. But it left her with only about $50 in her checking account. Her lease does not expire for another year. Her phone has started ringing.

"You tend to avoid the phone calls," she said. "Sometimes I pick it up and say, 'Look, I'm trying to get a job.' "

But it's never too late to make amends. If you've missed two payments, don't miss a third. If you're three in the hole, don't make it four.

"Most lenders would rather have an adjusted payment schedule than foreclose on the vehicle," Gillis said. "It's more expensive, and it's a hassle. They're not in the business of reselling cars."

San Gabriel said she called her dealer to complain when her car broke down after just a year on the road. She said she asked the dealer to contact the lender to explain why she stopped making payments. But once she started receiving phone calls from creditors, she realized she was the one who had to discuss it with the lender.

San Gabriel negotiated a plan to extend the length of her loan to make up for her missed payments. Her Jeep sits immobile in her driveway while she putters around in a used $1,600 Buick that she purchased with help from her father. She is trying to save money to get the Jeep fixed.

"I definitely think that the bank that I'm working with is definitely fair," San Gabriel said. "If somebody borrowed money from me, I'd definitely expect them to pay it."

If you're at risk of defaulting or being repossessed . . .

At the end of the bankruptcy clinic in Falls Church, lawyer Nancy Ryan distributed a handout titled "Can I Keep My Car?" The short answer: It's getting tougher.

"They're getting more aggressive with the cars now," she told the class. "They want everyone to be on the hook for the full amount of the loan."

Another woman in the class, a 39-year-old from Alexandria, said her Ford Taurus was repossessed in 2003 after she lost her job and could no longer afford the payments. She still owed $10,000 on it, and her lender has begun garnishing her wages at her new job to collect that debt.

A year ago, she bought a replacement car, a $14,000 used Ford Explorer. She pays $466.01 a month for it but finds it hard to keep up with the old debt still hanging over her.

"Now the past debt is going to cause me to lose this one," she said. "I was trying not to go there. I was trying to work it out. But I wasn't able to do it."

According to Edmunds.com, about 1.6 million autos will be repossessed this year, about a 10 percent growth over last year. Financial experts said that it is possible to bounce back from repossession or even bankruptcy but that it requires kicking bad spending habits and perhaps even a change in lifestyle. Credit-reporting agency Equifax said it takes seven to 10 years for a bankruptcy or collection to be removed from your credit report.

"People need to think realistically about how much car they need and what it's worth to pay for that," Reed said. "It all starts with people getting in over their heads in the first place."