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Millions are behind on their car payments. Are you?

As of January 2019, more than 7 million borrowers are 90 days or more behind on their car loans, according to the New York Federal Reserve. That’s 1 million more than the previous high in 2010 when the U.S. was in the Great Recession. The Fed also noted a $584 billion jump in total auto loan debt, the highest number in the 20 years the Fed has been keeping this data.

The source of the increases: More sub-prime auto loans offered by auto finance companies to less-qualified borrowers. While the number of auto loans has jumped, it also means there are more borrowers at high risk of delinquency, according to the report.

With more bad loans and more people taking out loans, that means more people handing over the car keys to finance companies in lieu of payment. Personal bankruptcy may not be far behind.

Some more car loan data

The research firm Edmunds found that auto debt is rising partly because Americans are buying trucks and SUVs rather than sedans and compact cars. Edmunds reports that the average price of a new vehicle is $37,100, compared to $27,573 five years ago.

To finance the bigger cars, the auto loans are longer in duration. Edmunds found that the average loan today is 69 months compared to 61 months in 2010.

Interest rates themselves are higher – 6.2 percent today compared to 5 percent one year ago.

How to afford you vehicle

All these figures mean more people will face unpaid debt, low credit scores and bankruptcy. Is there a way for you to avoid falling in this trap?

The best way to avoid ending upside-down on a car loan is to arrange for your financing before you buy. If you get pre-approved for a loan through your bank or credit union, you will likely receive a smaller interest rate than the one offered by the dealership or the sub-prime loan finance operation. This will save you several thousand dollars through the life of the loan.

When you arrange your loan, put as much money down as possible – as much as 20 percent if you can afford it – and keep the length of your loan to three years to keep the amount you pay in interest low. A shorter loan also helps you avoid your car depreciating faster than the value of your loan.

The best advice is not to buy too much car – consider buying a used car instead of new.

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