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NY Fed: US auto loans soar to highest in 8 years

By WTOP Staff

CHRISTOPHER S. RUGABER
AP Economics Writer

WASHINGTON (AP) — U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers, according to a report Thursday by the Federal Reserve Bank of New York.

Yet the New York Fed also said that loans to borrowers with shoddy credit, also known as subprime lending, still make up a smaller proportion of total auto loans than before the Great Recession.

Federal banking regulators have raised concerns in recent months over the rapid increase in subprime auto loans. Such loans could lead to more defaults, harming banks and consumers. Auto loans are also packaged into securities and sold to investors, like mortgage loans. That could amplify the impact of any rise in auto loan defaults.

This spring, banking regulators at the Office of the Comptroller of the Currency said that “signs of increasing risk are evident” in auto lending. They found that lenders are making larger car loans. As a result, the size of car loans in default has increased in the past two years.

General Motors said last week that the Justice Department is investigating its financing arm over its subprime lending practices.

Still, the New York Fed report stops short of recommending specific steps. In a separate post on its website, New York Fed economists said they would “continue to monitor” the issue.

Banks and other lenders issued $101 billion in new auto loans in the April-June quarter, according to the quarterly report on household debt. Total outstanding auto loans rose to $905 billion in the second quarter.

Auto loans are the third-largest source of Americans’ debt, after mortgages and student loans. Mortgage debt actually declined in the second quarter to $8.1 trillion while student debt rose to $1.12 trillion. Americans have $669 billion on their credit cards.

Mortgage lending weakened in the second quarter to the slowest pace in 14 years. That includes both mortgages for purchase and refinancing. Banks have significantly tightened their credit standards for mortgage loans since the recession. Home sales have also leveled off this year.

The Fed’s data shows that the dollar amount of subprime auto loans — defined as loans to borrowers with credit scores below 620 — has nearly doubled since 2010. For borrowers in the two most credit-worthy categories — defined as those with scores above 720 — auto lending has risen by only about one-third.

The automakers’ financing arms account for most of the increase in subprime loans. In the second quarter, the dollar value of their subprime loans was triple that of the banks. Economists at the New York Fed said that loans by auto financing companies are much more likely to become delinquent than those by banks.

Still, auto lending to credit-worthy borrowers has also jumped, the report said. As a result, just 22.2 percent of auto loans were subprime in the second quarter. That is still below the 25 to 30 percent that existed before the recession.

And the percentage of auto loans that were 90 days or more overdue was 3.3 percent in the second quarter, the same as in the first quarter. That compares to 3.4 percent of mortgages that were overdue, 10.9 percent of student loans, and 7.8 percent of credit cards.

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Contact Chris Rugaber on Twitter at http://Twitter.com/ChrisRugaber

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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