Announced today, TransUnion’s Payment Hierarchy study found that consumers were more likely to pay their auto loans before their credit cards and mortgages in 2011. The study also found that the divergence in payment patterns ― where consumers are increasingly apt to pay their credit cards before their mortgages ― has continued for four years straight.
The reasoning? Simply put, “People need their cars to get to work,” Ezra Becker, vice president of research and consulting for TransUnion’s financial services business unit, told AutoFinanceNews.net. “They need a car in order to seek employment or maintain employment.”
The study looked at a sample of about four million consumers in each quarter of 2011 that had at least one open auto loan and one open credit card and one open mortgage. In each quarter there was a clear preference for remaining current on auto loans ahead of credit cards and mortgages.
- 9.5% were delinquent on an auto loan while current on their credit cards and mortgages
- 17.3% were delinquent on a credit card while current on their auto loans and mortgages
- 39.1% were delinquent on a mortgage wile current on their auto loans and credit cards
“In other words, the auto loan is seldom the first choice when a consumer has to decide which payment to miss,” Becker said.
Through the study, it’s apparent that consumers have changed their priorities. As unemployment remains high and real estate values continue to depreciate, people have found more equity in their vehicles than in the homes they once called their havens, he noted.
“You can’t drive your house to work,” Becker said. “But the truth is, you can live in your car.”
It’s not that they don’t want to pay, but with the stresses facing consumers today, different choices have to be made. TransUnion refers to it as “Survival Default,” Becker said.
After 90 days delinquent on a credit card, you can no longer charge something, but with a mortgage, it can be well over a year before someone is forced to leave. And with a used-car market like never before, consumers now have equity in their vehicles, he noted.
Lenders may have always thought consumers valued their homes, but they were wrong. “It’s that they valued the equity,” Becker said. And nowadays, they value the car equity, he added.
“It goes to show how profound the impact of the aftermath of the recession has become,” he said.
The study provides lenders with better insight and better equips them to help consumers get through difficult times and perhaps make the duration of financial stress a little shorter.
The change isn’t necessarily permanent, either. “We will see a return to the traditional payment hierarchy once employment returns and home values go back up,” he said.