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Auto Debt Reaches New High According to Fed Report

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The total amount of auto loan debt reached historic highs this fiscal quarter according to a report by the Federal Reserve Bank of New York. The findings stated that during Q3 2013, total debt for auto loans increased $31 billion, reaching a $845 billion high.

Auto loan debt increased nearly as much as student loan debt, which added $33 billion to a total outstanding debt balance of $1.03 trillion.

The Fed reported other debt shifts, such as the $4 billion increase in credit card balances and the $56 billion increase in total mortgage debt. Total household debt increased 1.1 percent in a single quarter, reaching a total of $11.28 trillion.

The recent upswing in overall auto loans was partly caused by the purchase delays that occurred after the economic downturn, according to Steven Hirsch, a certified public accountant at Cohen Greve & Company.

“Now that the Recession is in our rearview mirror and the economy is recovering, people are more inclined to purchase a new car,” he said.

Hirsch said the historically high debt rates are created by a strong consumer demand, coupled with increased gas prices and the high cost of cars.

Joe Parker, founder and CEO of newcarbuyguy.com, said that as a consumer’s total debt increases, their willingness to take on higher interest rates increases alongside.

Parker partly blames the increase in auto loan debt on trade-ins. If a consumer takes on a five-year auto loan term, but decides to trade in a car after only three years, the remaining balance and fees for the previous vehicle is added to the new car loan.

That added cost further burdens consumers who turn to longer auto loans terms or less favorable borrowing terms.

“It is typical of the temperature of the economy,” Parker said.

Another current threat for consumers is limited borrowing options. Parker said many banks are leaving the auto lending industry because, despite the potential for profit, it is not worth the risk. If a bank continues offering auto loans, it usually charges higher interest rates between 6 and 8 percent to detract borrowers.

Parker said this puts consumers in a troubled state and is a “scary sight.”

To make up for this lack of business, credit unions and dealerships have taken over the auto loan industry. But in order to keep the auto market thriving positively, cooperating is needed, Parker said.

“Auto makers and the banking industry are going to have to come together to curb this feverish market,” he said.