Cars Are More Valuable Than Homes for Most Americans
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UPDATED: Jun 28, 2012
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Beating both credit card payments and mortgage bills, car loan payments have become the main priority of most Americans, according to a recent report by TransUnion.
Prior to the housing crash in 2008, most Americans paid their mortgages before they did their car loans. Following the crash, however, most Americans saw it wiser to pay off their automobiles before diverting money to their mortgages. This came about as home prices collapsed and millions of Americans felt the sting of foreclosed homes and upside-down mortgages.
According to the TransUnion report, which surveyed 4 million borrowers in 2011, 39.1 percent of borrowers who missed their mortgage payments continued to make timely payments on their car loans.
This trend was even more pronounced in two states that suffered severe real estate value declines: Florida and Michigan.
This shift in payment patterns shows that borrowers are placing a higher value on cars, or more specifically the ability to commute, than on homes and mortgages.
According to Steve Chaouki, TransUnion vice president of financial services, cars are relied upon to get to and from work, which is essential to employment and the steady flow of income. Car loans are not revolving loans, and the difficulties caused by a repossessed car can prove disastrous for individuals and households.
Lenders Take Note
While home prices have declined by roughly 34 percent since their peak in 2006, the value of used cars has actually risen over the past two years. This happened due to the supply of used vehicles shrinking since buyers were holding onto their cars longer. Would-be new car buyers also opted to instead purchase previously owned cars.
Eager to recoup their recessionary losses, banks and lenders recognize that car loans are much more profitable—and reliable—when compared to mortgages. While mortgage lenders have been fairly tight in dispensing home loans, income-hungry dealerships and car loans lenders dropped their requirements for new and used car loans. This shift in lending standards has increased the quantity of subprime car loans for borrowers with poor credit scores.
In 2011, auto lenders issued $169 billion to borrowers with credit scores below 700. This was a 26 percent increase compared to 2010.
“I expect things to stay like this as long as homes are not appreciating,” said Chaouki.