6 million Americans have stopped paying their car loans, and it's becoming a 'significant concern'

There is a lot of talk out there about the auto-loan market right now.

Hedge fund manager Jim Chanos has said the auto-lending market should "scare the heck out of everybody," while used-car dealerships and their auto lending practices have been given the John Oliver treatment on TV.

It's a topic we've been paying attention to, too. In a presentation in September at the Barclays Financial Services Conference, Gordon Smith, the chief executive for consumer and community banking at JPMorgan, set out some eye-opening statistics on the market.

Now the New York Federal Reserve is taking a closer look at the market. In a blog published Wednesday, November 30 on the NY Fed's Liberty Street Economics site, researchers highlighted the deteriorating performance of subprime auto loans, and set off the alarm.

RELATED: Average car loan rates by state

"The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years," the report said.

To be clear, the overall delinquency rate for auto loans is pretty stable, and the majority are performing well.

There are, however, signs of stress in the subprime market segment, which has seen rapid growth. Here are the key numbers from the report:

  • The subprime delinquency rate for the trailing four quarter period moved to 2% in the third quarter. The only other time it was 2% or more was in the aftermath of the financial crisis.
  • Subprime auto loan originations hit $31.3 billion in the third quarter, down from $33.6 billion in the second quarter. Bank and credit unions originated $9.5 billion in subprime auto loans in the period, a record high.
  • Outstanding subprime auto loan balances now stand at $280.2 billion, a record high. For perspective, the pre-crisis high was $249.5 billion, in the fourth quarter of 2007.

In other words, the subprime delinquency rate is creeping up while the subprime market is ballooning in size. The Liberty Street Economics post, written by Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert Van Der Klauuw, said:

"The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments."

This research has broader significance, beyond the auto loan market. We've previously reported at length on the worrying state of US consumer finances.

RELATED: 10 purchases you should never make with a credit card:

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10 purchases you shouldn't make with a credit card
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10 purchases you shouldn't make with a credit card

#1: Household bills

If you are already cutting it close for the month, you may be tempted to use plastic to pay the utility, cellphone or cable bill. But if you’re not paying off your full balance each month, the interest you will be charged makes those monthly bills even more expensive.

Photo credit: Getty

#2: Cars 

Car dealers often don’t allow credit card purchases, or may limit the amount of the purchase price you can put on your card. Dealers don’t like credit card payments because they have to pay the 1 to 3 percent fee the card company charges to process the transaction.

You could exercise the cash-advance option. But you’ll pay a fee and a higher interest rate. Also, you won’t get a grace period on the interest — it will begin to accumulate right away.

Instead of using a card, go to a credit union or bank to get financing approved at a reasonable interest rate before shopping for a car.

Photo credit: Getty

#3: Student loans

If you can’t afford to pay your federal student loans, you have options. They include an income-based repayment plan, deferment, forbearance and possibly loan forgiveness. Take a look at “How to Get Free Help With Your Student Loans” to learn more.

Paying your student loan debt with a credit card increases the amount of interest you’re paying on the debt. Even if you have a zero-percent introductory credit card offer, it will expire in time.

And while the federal government will accept a credit card payment for loans in default, many student loan servicers won’t allow this form of payment.

Photo credit: Getty

#4: Retail therapy

Think a new purchase will cheer you up? Perhaps. But remember that cash is king if you choose this mode of “therapy.” Use cash, and you won’t let your credit card balance spiral out of control.

Photo credit: Getty

#5: Medical bills

If you use a medical credit card available through your health care provider’s office to pay bills, be careful to read the fine print about your obligations.

Also consider steps you can take to reduce health care costs. See “10 Ways to Fight High Medical Bills.”

Photo credit: Getty

#6: A night on the town

Handing your credit card to an unscrupulous waitperson equipped with a skimming device isn’t your only worry. If you’re out on the town throwing back drinks, it’s easy to run up a tab you can’t afford.

So when painting the town, it’s best to pay with cash.

Photo credit: Getty

#7: Big-ticket items you can’t pay off immediately

Credit cards offer great purchase protections and should be used for many big-ticket purchases. But buying something on credit when you can’t afford to pay it off right away isn’t smart.

Photo credit: Getty

#8: Credit card payments

You can’t charge your monthly credit card payment on another credit card. But perhaps you’ve been tempted to use a cash advance from a credit card to bolster your checking account so that you can pay other bills.

We’ve already explained the folly of cash advances. Your credit card is not an ATM and should not be used as one.

There are real benefits, however, to transferring high-interest credit card debt to a new card with a generous zero-percent balance transfer offer. Just be aware of the balance-transfer fee and find out how long the offer lasts.

Photo credit: Getty

#9: ‘Sale’ items

Convinced that you might miss out on savings if you don’t purchase a specific item on sale right away? That’s one of the warning signs of an impulse buy.

Wait a day and think about whether you really need the item. Nine times out of 10, the answer will be “no.”

You aren’t saving money by spending it for something you don’t need.

Photo credit: Getty

#10: Unsecured online purchases

When shopping online, make sure the web address has “https” at the beginning. If it doesn’t, that’s your cue to take your online shopping elsewhere.

In fact, do your homework before purchasing anything online to make sure a company is reputable and not the source of many consumer complaints.

Which purchases do you refrain from making with your credit card? Let us know in the comments below or on our Facebook page.

Photo credit: Getty

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According to UBS research, 65%, 36%, and 22% of lower-, middle-, and higher-income cohorts are "stressed." That means their income falls below or barely covers their expenses. And almost one in five "stressed households," or 18%, agreed or strongly agreed with the likelihood of a default over the next year.

When these stressed households were asked what debt they were most likely to default on, auto loans ranked third, behind credit cards and student debt.

"Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households," the Liberty Street Economics post said.

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