Over-extended credit and turmoil in the banking industry played a major role in the Great Recession of 2007 – 2009. That’s why these two stories from Media Post caught my eye quickly this morning.
Driving auto delinquencies down. This article cites data from Experian in suggesting that late payments are falling for automotive. Further, the average new loan term has dropped from 63 months to 62 months, year over year.
Mortgage paper… or plastic? This story highlights a report by Cardbeat/ACG, indicating that many consumers are now more likely to pay their credit card bills first, and their mortgage second.
Implications: First, while the automotive story suggests that one cause of the falling delinquency rate is greater scrutiny on the part of companies who are writing loans, perhaps consumer efforts to pare-down debt are also a factor in the reduction of tardy car loans. As recently as 2007, 45% of all car loans came with a payback term of six years or more. More troubling, the average car owner owed $4,221 more on their vehicle than it was worth at the time it was sold. [Source: The Los Angeles Times and Edmunds, 12.30.07.] It’s not surprising that consumers would be recalibrating their use of credit.
Second, many protections are built-in to the typical mortgage, which make it comparatively difficult for a lender to take action against a borrower. Less so for a credit card relationship; penalties (ranging from late fees to higher interest rates and impact on credit scores) can be swift and severe. It only makes sense that bills with consequences that hurt first and worst would be paid ahead of those with friendlier terms; terms that might be interpretted by some folks as a built-in bonus grace period... during times of financial distress.
Mike Anderson
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