You will likely need to take out a loan at some point in your life, whether it’s to buy a home, finance a college education, purchase a car, cover an emergency expense, or convert expensive credit card debt to less expensive installment debt.
In fact, the average American owes close to $90,000 in debt. This indicates many of you have already taken out loans or revolving credit card debt rather than being in the marketplace for such credit.
What follows are some pretty shocking statistics regarding consumer debt, including the cost of such debt, the availability of credit, the downside of defaulting on debt, and the upsides of properly managing your debt. You can examine these statistics and decide for yourself which ones are the most applicable to your current or yet-to-be-determined situations.
The statistical data below applies to what is happening in the country, which is important considering how COVID-19 has impacted our lives, the job market, the stock market, and the overall economy.
1. Auto Loan Debt is Climbing at a Historic Rate
Unless you can write a large check for tens of thousands of dollars, you are likely going to have to borrow money when you buy a vehicle. These loans are commonly referred to as auto loans.
Auto loans are partially secured installment loans. Installment means you make a fixed payment for a fixed number of months. Secured means you will have to pledge the vehicle as collateral to secure your loan.
U.S consumers recently set a record for the amount of debt incurred for vehicle loans. Specifically, Americans were indebted to their auto lenders to the tune of a staggering $1.18 trillion dollars in the first quarter of 2019. This figure is up 6.5% when compared with the prior 12 months, according to Experian.
The increase in auto loan debt may reflect consumers either financing vehicle purchases more often or the amount they are borrowing and spending to buy or lease vehicles has increased.
Some 85% of new vehicles are purchased using some form of financing, which Experian defines as being either a loan or a lease, according to the same study. Compare that figure to the 56% of used vehicles that are purchased using some form of financing, which makes sense given used vehicles are generally going to be less expensive.
When the amount you’ve borrowed for a vehicle goes up, so does your monthly payment amount. Not only did the average new vehicle loan amount hit a record high of $32,187 in Q1 of 2019, but the average monthly payment amount for new vehicles has also hit a record high of $554, according to the Experian study.
Used vehicle loans similarly set a record of $20,137 for the average loan amount. The average loan payment for a used vehicle loan increased to $391 per month.
2. Fewer Borrowers Are Paying Late During the Pandemic
This statistic is counterintuitive. The coronavirus pandemic has had a major impact on the financial lives of many Americans, including their jobs and incomes.
However, despite this fact, Experian reveals that between January and June 2020, the number of loan delinquencies (aka late payments) per consumer has actually gone down. This applies to all levels of delinquency from 30 to 90 days.
Keep in mind that many lenders have been flexible with their customers during the pandemic. Some companies, including federal student loan servicers, have temporarily paused loan payments altogether because they were required to do so in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act required mortgage lenders to offer hardship relief options on government-insured mortgage loans as well.
Other lenders and credit card issuers have voluntarily made hardship relief options available during the pandemic. Companies that offer relief must continue to report the account as current, as long as consumers keep up their end of the bargain with any special payment arrangements as well. This relief is formally referred to as an accommodation in the CARES Act text.
3. Home Foreclosures are at Record Lows
Not only are delinquencies down in 2020, but there have also been fewer new foreclosures of mortgage loans as well. Only 24,000 new foreclosures were started during the second quarter of 2020, according to the Federal Reserve’s Center for Microeconomic Data. Fewer foreclosures mean more people get to stay in their homes if they’re delinquent or in default.
These Q2 2020 foreclosure numbers are by far the lowest ever reported since the Center for Microeconomic Data began its quarterly Household Debt and Credit series back in 1999. Of course, it’s important to remember that these numbers are heavily influenced by the fact that federally backed mortgages were temporarily protected from foreclosure thanks to the CARES Act.
4. More Loans Are in Hardship Status
Dovetailing nicely from statistic #3 above, the fact that there are fewer loan delinquencies among consumers in the U.S. now is largely due to federal coronavirus relief measures. When loan relief measures come to an end, however, the average number of late payments is likely to rise.
One statistic that is especially troubling is the number of loans currently in hardship. Recent TransUnion data revealed an uptick in the percentage of accounts in this status.
The percentage of borrowers who are participating in special payment arrangements (or payment pauses) with their lenders has increased across the board. Mortgage and personal loans have increased by more than 10 times.
Although many lenders have been willing to work with consumers who can’t afford their loan payments during the pandemic, hardship allowances are not permanent and won’t last forever. At some point in the not-too-distant future, borrowers will have to start repaying their loans as they originally agreed.
Those who can’t afford to do so may need to consider alternative options, including debt consolidation, working with a credit counselor, or even filing for bankruptcy protection from their creditors.
5. Average Debt is Down, Personal Loan Debt is Up
For the most part, Americans have been either avoiding new debt or even paying down their debts this year. The average amount of credit card debt dropped from around $6,200 in January of 2020 to less than $5,400 in May. In cases where paying down credit card balances led to lower credit utilization rates, consumers may have enjoyed a credit score boost as a result of their efforts.
Overall, the average total debt balance per consumer also dropped — from $89,820 down to $89,272. That’s a decrease of -1% per person.
Non-household debt fell by a record $86 billion nationwide. That figure includes aggregate consumer credit card, auto loan, student loan, and other debt aside from mortgage loans, per the Federal Reserve.
There is, however, an exception to this downward debt trend. Since February of this year, the average personal loan debt increased from just under $16,000 to nearly $16,300. In all, personal loan balances have increased by 2% since the beginning of the year.
6. Loan Interest Rates Are Down
There’s no question that 2020 has been an unusual year in many ways. But one perk that some borrowers have been able to enjoy has been a steady decline in interest rates among most loan types.
The economic crisis caused by the pandemic has driven a decline in interest rates. The Federal Reserve recently shared the following good news about descending average interest rates from 2019 to 2020, which is illustrated in the graphic below. Lower interest rates mean the cost to service these types of debts is going down.
Since the pandemic spread to the U.S., mortgage rates have hit record lows in 2020, with the 10th record low reported on Oct. 15 by Freddie Mac.
For the first time in nearly 50 years of tracking, 30-year fixed-rate mortgages averaged about 2.98%, according to Freddie Mac. The graphic below provides a visual of average mortgage rates as of October 15, 2020.
This means it’s less expensive to finance a home, by quite a bit. In fact, if you’re in the market to buy a home, now is the time to do it.
7. Less Loan Funding is Available to Borrowers
Borrowers across the country have been able to take advantage of the lower interest rates currently available on mortgages, auto loans, and personal loans. But despite the lower interest rates, lending standards have tightened, making it harder to borrow money in certain industries.
This fact is especially noticeable in the mortgage world where investors have been pulling back as uncertainty about the economy continues. Mortgage loan availability dropped in April by 12.2%, according to the Mortgage Bankers Association. Conventional mortgage loans decreased by 15.2%, and government-insured mortgage loans decreased by 9.5% in April.
In other words, there is less funding available for home buyers and refinancers to access. This lack of liquidity, along with other factors, has made it more difficult for borrowers to take advantage of lower interest rates and actually secure loans in 2020.
8. Student Loan Balances Increased by $2 billion
Student loans represent another type of loan where balances are up rather than down this year. The Federal Reserve reports that student loan balances rose by $2 billion during the second quarter of 2020.
As a reminder, the CARES Act called for all federal student loans to be put into an automatic, interest-free forbearance period. Initially, the special payment suspension period was scheduled to last from March 27 through September 30, 2020. In August, President Trump extended federal student loan relief measures through the end of the year.
The special relief measures are likely the primary cause of the $2 billion increase in student loan balances this year. Borrowers who are taking advantage of these benefits should look ahead and prepare themselves to reincorporate monthly student loan payments into their budgets once these special provisions expire.
Those who are still struggling financially when student loan relief measures end may want to consider contacting their student loan servicers right away. Servicers should be able to discuss other options with these borrowers, including additional forbearance, deferment, and income-based repayment.
9. Loan Approval Criteria Has Become More Strict
Lenders are understandably nervous about loaning money in an unsteady economic climate. So, lenders are taking strides to reduce their exposure to the risk of loaning money and not being repaid as promised.
Certain auto lenders are requiring higher credit scores than usual, especially before they’re willing to offer lower interest rates or longer repayment terms to borrowers. Some mortgage lenders are following this same course of action.
A Federal Reserve Survey found that almost 55% of senior loan officers report tighter credit standards for government-backed mortgage loans between May and June 2020.
For example, JPMorgan Chase bumped up the minimum FICO Score requirement to 700. The Federal Reserve also reported that the median credit score for new mortgage loan borrowers rose to 784 in Q1 of 2020 (25 points higher than the same period in 2019).
Numerous mortgage lenders are reportedly requiring higher down payments as well. And Fannie Mae and Freddie Mac are asking self-employed borrowers to provide more detailed proof of income than was previously required for such loans.
10. The Debt-to-Income Ratio Has Improved by 27%
When you apply for a loan, the lender will want to know details about how much income you earn relative to the debt or debts you already owe. The relationship between these two figures is known as your debt-to-income ratio. Your DTI, as it’s also known, is a measurement of your capability to take on new monthly payment obligations.
DTIs have been decreasing since the 2008-2009 financial crisis. A lower DTI is a good thing in the eyes of the lender because it means a smaller percentage of your income is tied up with existing debt payments. When your DTI is lower, you may find it easier to qualify for loans and credit cards and to receive higher loan and credit limits as well.
DTI ratios were 27% lower in 2018 than they were nearly a decade earlier in 2009, according to Experian. Yet the reason DTI ratios have gone down is not primarily due to consumers owing less debt than they did in 2009.
The average total debt was $94,442 in 2009. By 2018, that figure had fallen to $90,460. However, the changes in the average personal income during that same period were more drastic — $38,213 in 2009 versus $50,413 in 2018.
DTI becomes simple mathematics at that point — higher income plus lower debt equals a better ratio.
11. Payday Loans Are Used by Some 12 million Americans
A payday loan is a very short term loan for a relatively small amount of money, usually not more than a few hundred dollars. With a payday loan, the borrower gives the lender access to his or her checking account either in the form of a postdated check or via electronic access. The lender will either cash the postdated check or withdraw money electronically to cover the loan amount or to make a payment.
Payday loans, which are illegal in many states, are very expensive. When annualized, the APR of a payday loan can be several hundred percent. To the extent you can avoid payday loans, you would be well advised to do so.
Unfortunately, not everyone can make ends meet and resort to payday loans to help them cover expenses until the next paycheck. Some 12 million Americans use payday loans every year. The average loan amount is $375, and borrowers pay some $9 billion annually in fees.
Payday loans are not reported to the credit reporting agencies. As such, they have no redeeming value to your credit scores. The point being, even if you make all your payday loan payments on time, your credit reports and credit scores will not benefit.