Business

Car debt is on the rise in Iowa. Is it the next bubble?

U.S. car buyers owe $1.3 trillion in auto loan debt

Keara Wenzel, of Hiawatha, stands with her 2014 Ford Escape in southwest Cedar Rapids, Iowa on Tuesday, Sept. 10, 2019. (Jim Slosiarek/The Gazette)
Keara Wenzel, of Hiawatha, stands with her 2014 Ford Escape in southwest Cedar Rapids, Iowa on Tuesday, Sept. 10, 2019. (Jim Slosiarek/The Gazette)
/

After multiple auto loans, Keara Wenzel said she now is striving to save to be able to buy her next car outright.

Wenzel, of Hiawatha, bought her current vehicle, a used 2014 Ford Escape, around two years ago at McGrath Auto, which she said helped her secure a loan with a 3.74 percent interest rate.

Getting a low interest rate was a high priority for that purchase, Wenzel said, after a previous three-year payment plan with a 23.9 percent rate resulted in her paying more than $7,000 on a used car that cost $5,000.

“My recommendation for anybody who’s looking to buy a vehicle is to save as much as they can, live within their means and then take that amount of money that they normally would spend on a car payment until they get to the point where they can purchase a car they like better,” she said.

As of the second quarter of 2019, U.S. car buyers owe $1.3 trillion in auto loan debt — that’s equivalent to 5.5 percent of the national GDP — according to data from the Federal Reserve Bank of New York.

That figure is poised to increase in the future, as customers in 2018 took out $584 billion in new auto loans, the highest recorded amount in the 19 years of data collection.

“The amount of debt that’s out there right now, it gives us a short-term surge in business, but it scares me because the people doing 72- and 84-month, even some 96-month loans on cars, are going to affect our long-term business,” said Roger Cassill, owner of Cassill Motors in Cedar Rapids.

ARTICLE CONTINUES BELOW ADVERTISEMENT

“People have negative equity under their cars now at a rate like we’ve not seen before.”

At his business, Cassill said approximately 90 percent of customers buy cars using loans, with many owing more on their vehicles than they’re worth.

In Iowa, the auto debt balance was $4,370 per capita at the end of 2018, or a 66.5 percent increase from $2,720 per capita at 2008’s end, the Federal Reserve Bank of New York found.

Over that time frame, 2.59 percent of Iowa’s auto debt balance was more than 90 days delinquent, up from 1.9 percent 10 years before that.

One local lending institution, GreenState Credit Union, has seen a “slight uptick” in auto loan delinquencies recently. Jim Kelly, the credit union’s chief marketing officer, said the increase reflects the industry as a whole, though he noted GreenState limits its subprime lending.

‘Up to their eyeballs’

Rather than basing loan payments and terms around a specific desired car, Cassill said he advises customers to base their decisions on what payment plan they can handle.

“Rather than going by, ‘This is the car I want, I’m going to make the payment work,’ ... they need to just kind of back into that and say, ‘This is the payment I have and the maximum term I can spend, what car can I buy?’” he said.

Wenzel said people take out less-than-ideal loans in attempts to purchase showier cars than they should.

“It’s gone way too far,” she said. “People are in debt up to their eyeballs. It puts a lot of stress on the family, it challenges relationships and it’s not necessary.”

ARTICLE CONTINUES BELOW ADVERTISEMENT

A total of around 29,000 new and refinanced auto loans were made at GreenState in 2018, while nearly 30,000 were made in 2017, Kelly said.

This year to date, GreenState’s pace for auto loans has been slightly slower than in previous years, a trend Kelly said could be attributed to several potential factors, including greater financing competition, a decrease in car sales or increases in car leasing, customers paying in cash or using equity loans.

Shellsburg resident Sara Boren, who took out a loan from GreenState to buy a 2013 Lincoln MKX from Cassill Motors earlier this year, said she recommends customers shop around at different lending institutions before making car purchases.

Forest Brown, owner of Browns RV Guttenberg in Clayton County, said he believes there currently is a “buyer’s market” for cars in part due to relatively reasonable interest rates that still could decrease.

The national car debt likely will continue to grow on a gradual basis, he said, though potentially without Iowans as the biggest contributors.

“I feel like the consumer here in general is a little more conservative and tries not to get themselves in over their heads, so to speak,” Brown said.

Because of the current economy, Cassill said used car sales at his business currently are at a 10-year high.

“With that being said, sometimes, when the economy is really good, people buy new cars,” he added. “Seeing them buy used cars, that tells me that maybe they’re getting a little bit smarter with their money.”

Comments: (319) 398-8366; thomas.friestad@thegazette.com

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.