Consumers Pay Auto Loans before Mortgages
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UPDATED: Mar 29, 2012
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Believe it or not, a current study reveals consumers are more likely to pay back their auto loans than they are their mortgages. Even credit cards are favored over home payments, as consumers are losing faith in the value of a mortgage.
“The auto loan is seldom the first choice when a consumer has to decide which payment to miss,” said Ezra Becker, vice president of research and consulting at TransUnion, according to a MarketWatch.
Indeed in over 4 million people surveyed by TransUnion, over 40 percent of people who fell behind on their mortgage kept their auto loan and credit card payments current.
The reason for this prioritization is because consumers need a vehicle for both employment and social opportunities. If consumers fall behind on their auto loans, they will lose their vehicle and will often be put in a position where other debts will be defaulted on.
Additionally, credit cards have surpassed mortgage payments because families are now resorting to using plastic to purchase everyday necessities, such as food and water. As a result, they have placed credit card importance over the often volatile (and frequently upside-down) asset of a house.
“The impact of repossession is greater than the loss of a credit card,” said Becker, so consumers still place their auto loans over credit cards since transportation is so vital to success.
Another contributing factor to this new “payment hierarchy” is that defaulting on a mortgage isn’t necessarily viewed as a bad thing anymore. With the nation’s onslaught of foreclosures, banks have fallen weeks and months behind on their paperwork. If a consumers fail to make their home loan payments, oftentimes they can retain ownership, free-of-charge, for several months. Without a mortgage payment, they can then devote that money to other debts.
It’s precisely due to this reason that auto loan originators are loosening their lending standards and granting vehicle financing to what the credit rating agencies call “subprime” borrowers. In the eyes of auto lenders, borrowers who default on their mortgage aren’t “subprime” since, without a mortgage, they now have a ton of income that can be put towards an auto loan.
The national delinquency rate for these three types of debts is further evidence that consumers favor their vehicles over their other possessions. The delinquency rate for mortgages sits at roughly 6 percent, while credit card delinquency is 0.78 percent. But auto loan delinquency rate reigns supreme, boasting an impressively low 0.46 percent.