Lower tax refunds mean some people are not catching up on their bills

The US economy can be strong. But we continue to see signs of financial stress indicating that just having a job may not be enough to pay the bills.

Of course, many consumers are catching up when they receive their tax refund check. This year, repayments could be much smaller than expected, however, the challenges ahead are even more worrying.

The Microeconomic Data Center of the Federal Reserve Bank of New York revealed that total household debt reached $ 13.5 trillion in the fourth quarter of last year, an increase of $ 32 billion or 0.2%.

Overall household debt is now 21.4% higher than the bottom reached by the financial crisis in the second quarter of 2013, according to data from the Fed.

Some numbers:

• Outstanding debt for student loans rose from $ 1.44 trillion to $ 1.46 trillion.
• New auto loans reached $ 144 billion in the fourth quarter of 2018, continuing the nine-year growth trend. Auto borrowing totaled $ 584 billion in 2018, the highest year in historical data for 19 years.
• Credit card balances now total $ 870 billion, the first time credit card balances have reached the 2008 peak.

Consumers out of budget face difficulties because they have so many other bills to settle, such as student loans.

The Fed's data showed that 11.4% of total student debt was overdue or past due for more than 90 days in the fourth quarter of 2018. This is a slight improvement over the bond registered in the third quarter of 2018.

We have concerns about the growth of unpaid car loans, especially among young borrowers and those with bad credit.

According to Fed data, a record 7 million Americans have 90 days or more behind on their car loan payments.

The New York Fed noted that there were now "more risky auto loan borrowers than ever before, and therefore a larger group of high-risk delinquents".

Need a car? If you have credit problems, you are considering taking a high cost subprime car loan, which can nibble your overall budget.

Risk loans rose in the second half of 2018 as lenders became more aggressive, said Jonathan Smoke, chief economist at Cox Automotive.

He said the Fed's data shows that high-risk auto loan volumes are much higher, rising more than most other credit levels from July to December.

"We started seeing serious bad debts increase in the fourth quarter," said Smoke.

It is important to understand, however, that unpaid bills tend to be seasonal. People generally find it harder to pay for their car at the end of the year and at the beginning of the year because of holiday bills, as well as large heating bills in some areas.

"They then tend to improve in the spring when tax refunds are used to pay off their debts," Smoke said.

Smaller tax refunds can hinder

But he fears that some consumers will have more trouble paying their old bills this spring – if they rely on a large tax refund and end up receiving much less than expected. Some might even have some money once they have prepared their 1040 tax return – and face another unexpected bill.

The reason: the tax deduction tables were adjusted in February to reflect the lower tax rates set out in the 2017 Employment Tax Reduction Act and the l & # 39; employment.

Many people receive more net pay, but the amount withheld for taxes may be lower than their actual tax obligations for 2018.

Uncertainty surrounding tax refunds will be a bigger risk this year, Smoke said.

"Late payments are likely to worsen, not better this spring," he predicted.

For those looking to buy a car, he said, the assumption is that credit will tighten this year, especially for risky loans.

More: Early repayment of federal tax smaller than what many expect

More: Economist: the auto industry could create the next recession

More: Frustration grows, Trump's tax cut affects repayments

Despite a low unemployment rate and robust economic growth, one-third of moderate-income adults in the United States face financial insecurity every year, according to a new study by the Urban Institute.

At some point, some members of this group end up turning to payday loans, pawn shops or other high-cost strategies to pay their bills.

Among adults in moderate-income households – those earning between $ 40,840 and $ 81,780 per year for a family of three – about one-third reported having faced a daunting challenge over the past year – in particular having been contacted by a collection agent; missing a payment by credit card; missing another payment, not a mortgage; or be unable to find $ 400 for an unplanned expense, according to the Urban Institute study.

Even Federal Reserve Chairman Jerome Powell recently acknowledged that "prosperity has not been felt so much in some areas, especially in many rural areas."

Of course, the problem for many is that many people need a car to find a job anywhere in America.

And they often need a car loan to get that car.

Auto financing is up

Currently, 85% of all new car purchases in the United States are funded. This represents a 75% increase in 2009.

Buyers who opt for a second-hand car also tend to take out loans. More than half of all used car purchases are funded, up from 46% in 2009, according to research conducted by the US PIRG and Frontier Group.

"We are concerned that auto lenders continue to take on risky loans to a growing number of people," said Ed Mierzwinski, senior director of federal consumer protection programs at PIRG and co-author of the program. a report entitled "Driving In to Debt".

The slackening of auto credit after the Great Recession, which ran from late 2007 to June 2009, contributed to the rising level of car debt, the study said.

The Fed's policy favoring a low interest rate environment has helped to fuel borrowing over time.

Yet cash-strapped consumers can be trapped in predatory lending practices, including loans to people who do not have the ability to pay for these auto loans, according to the "Driving In to Debt" research. Some also lose money with expensive "complements", such as expensive extended warranties, which are added to the consumer loan.

While many struggling consumers can not afford to live without a car, they discover that they can not afford the car loan they have just contracted.

Experts believe that late payments on car loans should not be the seeds of the next financial crisis.

A sign of bad roads ahead?

Economists estimate that it is too difficult to predict that the US will sink into a recession, simply because unpaid car loans have recovered after the strength of the car sales market.

"Given the increased use of subprime auto loans in recent years, late payments should not come as a surprise," said Robert A. Dye, chief economist at Comerica Bank.

Nearly one-third of Americans with credit reports have at least one auto loan, which is well above historical data.

As a result, we are seeing more and more people taking out loans to buy cars, including more people who may not have good paying jobs or good credit.

In addition to this, car debt accounts for only 9.4% of total household debt.

We do not face the same problems as 10 years ago, when people struggled to pay off their mortgages before and during the financial crisis.

Even so, the Fed noted on its blog that auto loan performance, which has been slowly deteriorating since 2012, deserves to be monitored.

And consumers under the age of 30, who are more likely to be behind in car payments, may be more worried.

"Young people are generally more indebted and this can be a factor," said Dye.

Contact Susan Tomporat 313-222-8876 or [email protected]. Follow her on Twitter @tompor. Learn more about companies and sign up for our newsletter.

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