Paying Your Car Loan First: The New American Priority

There is a significant change afoot in terms of how American households are prioritizing which debts to pay first.

The long-term assumption has always been that people will pay their mortgage before they cover debts for their car, for their television, or for their student loans. Now it appears that this is no longer the case.

The evidence can be seen clearly in the default rates. Almost nine percent of mortgage loans are delinquent right now. The OCC says that 88 percent of mortgages serviced by an OCC-regulated lender were current at the end of Q3 2011. Equifax says that fewer than six percent of car notes are late.

This makes a comment about the value people place in home-ownership. Back before 2008, all kinds of people felt that owning a home was the best way to build a nest egg. Experts like Michelle Singletary and Suze Orman (albeit with some strict qualifications) supported the idea of buying a home.  Now there is a sea change: people can move to a new home readily, but they seem to think that the biggest crisis would be to lose their means of getting around.

Need is probably only a part of the story. It is also true that it is much harder to lose your home. There will be two rough-looking guys knocking on your door if you go two months without paying on your car. “We need your keys,” they will say while holding a large crow bar.

It can take at least six months and maybe as long as eighteen months for a bank to endure the loan modification process. Many factors, from intransigence by lenders to policy efforts by Treasury, make it

Even the riskiest borrowers pay their car loans. Consumer Portfolio Services (ticker: CPS), one of the nation’s largest packages of securities backed by subprime car loans. CPS says that homeowners are more likely to pay on time (page 11). In their portfolio, less than eight percent of borrowers are more than 30 days delinquent. Moreover, these are not borrowers with sterling credit ratings. Only one of their loan programs, which holds less than two percent of their debt, has an average FICO (page 14) of greater than 600.