Smaller tax refunds mean some won't catch up on bills

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

Many consumers, of course, play catch up when they receive their tax refund checks. This year, refunds could be much smaller than expected, though, so there's even more concern about challenges ahead. 

The Federal Reserve Bank of New York’s Center for Microeconomic Data disclosed that total household debt increased to $13.54 trillion in the fourth quarter last year, up $32 billion or 0.2 percent.

Overall household debt is now 21.4 percent above the post-financial-crisis bottom reached during the second quarter of 2013, according to the Fed data. 

Some of the numbers:

• Outstanding student loan debt increased to $1.46 trillion from $1.44 trillion.
• Newly orginated car loans hit $144 billion in the fourth-quarter of 2018, continuing the nine-year growth trend. Auto loan originations totaled $584 billion in 2018, the highest year in the 19-year history of the data.
• Credit card balances now stand at $870 billion — marking the first time credit card balances re-touched the 2008 peak.

Budget-stretched consumers are running into some trouble because they have so many other bills, such as student loan debt, to juggle.

Fed data showed that 11.4 percent of aggregate student debt was 90-plus days delinquent or in default in the fourth quarter of 2018. That's a small improvement from the jump seen in the third quarter of 2018. 

We're seeing concern about growth in delinquencies involving auto loans, as well, particularly among younger borrowers and those with bad credit. 

A record 7 million Americans are 90 days or more behind on their car loan payments, according to the Fed data. 

The New York Fed noted there are now "more subprime auto loan borrowers than ever, and thus a larger group of borrowers at high risk of delinquency."

Need a car? If you're credit-challenged, you're looking at taking a high-cost, subprime car loan that can eat into your overall budget. 

Subprime lending grew in the second half of 2018 as lenders became more aggressive, said Jonathan Smoke, chief economist for Cox Automotive. 

He said the Fed data show much higher volumes of subprime auto loans, growing more than most of the other credit tiers from July through December. 

"We started to see severe delinquencies climb in fourth quarter," Smoke said. 

What's key to realize, though, is that delinquencies tend to be seasonal. People typically have more trouble making car payments at the end of the year and early in the year  because of holiday bills, as well as big heating bills in some areas. 

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

Smaller tax refunds may hinder some

But he's concerned that some consumers could have more trouble paying off their old bills this spring — if they're banking on a big tax refund and they end up receiving far less than expected. Some could even owe money once they prepare their 1040 tax returns — and face yet another unexpected bill. 

The reason: Tax withholding tables were adjusted in February to reflect lower tax rates that were part of the Tax Cuts and Jobs Act of 2017.

Many people received more take home pay but the amount withheld for taxes might fall short of their actual income tax obligations for 2018.

The uncertainty around tax refunds will pose a bigger risk this year, Smoke said.

"Delinquencies are likely to get worse, 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 subprime loans. 

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Despite low unemployment and robust economic growth, a third of moderate-income adults in the U.S. experience financial insecurity annually, according to a new Urban Institute study.

At some point, some in that group end up turning to high-interest payday loans, pawn shops or other high-cost strategies to pay their bills.

Among adults in moderate-income households — say those earning $40,840 to $81,780 annually for a family of three — roughly one third reported facing a serious challenge in the past year — including being contacted by a debt collector; missing a credit card payment; missing another payment, not a mortgage; or being unable to come up with $400 for an unexpected expense, according to the Urban Institute study. 

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

The problem for many, of course, is that many people do need a car to get to a job all across America. 

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

Auto financing is up

Currently, 85 percent of all new car purchases in the United States are financed. That's up from 75 percent in 2009.

Buyers who opt for a used car tend to take out car loans, too. More than half of all used car purchases are financed, up from 46 percent in 2009, according to research by U.S. PIRG and the Frontier Group.

"We're concerned that car lenders are continuing to make risky loans to more and more people," said Ed Mierzwinski, U.S. PIRG’s senior director for federal consumer programs and co-author of a report called "Driving Into Debt." 

The loosening of auto credit after the Great Recession, which ran from late 2007 through June 2009, has contributed to rising levels of debt for cars, the study said. 

The Fed's policy promoting a low-rate environment helped fuel borrowing over time. 

Yet cash-strapped consumers may get caught by predatory lending practices, including loans that are made to people who don't have the ability to repay those auto loans, according to the "Driving Into Debt" research. Some also lose money to expensive "add-ons," such as costly extended warranties, that are tacked onto the consumer's loan.

While many struggling consumers cannot afford to live without a car, they're discovering that they cannot afford the car loan that they just took out, either. 

Late payments on car loans, though, aren't likely to be the seeds of the next financial crisis, experts say. 

A sign of rough roads ahead?

Economists say it's too far of a leap to predict that the United States is headed into a recession, simply because auto loan delinquencies have picked up after what's been a robust market for car sales. 

"Given the greater use of subprime auto loans in recent years, higher delinquencies should come as no surprise," said Robert A. Dye, chief economist at Comerica Bank.

Almost one-third of Americans with credit reports have at least one auto loan — much higher than historical records. 

So we're seeing more people taking out loans to buy cars, including more people who may not have a high paying job or good credit. 

On top of that, auto debt only makes up 9.4 percent of total household debt. 

We're not dealing with the same issues as we saw a decade ago when people had trouble paying their mortgages before and during the financial crisis. 

Even so, the Fed noted in its blog that the slowly worsening performance of auto loans since 2012 is something that warrants monitoring. 

And there may be more concern about consumers under age 30 who appear more at risk of being late on car payments. 

"Young people are typically more saddled with student debt and that may be a factor," Dye said. 

ContactSusan Tompor at313-222-8876 or stompor@freepress.com. Follow her on Twitter@tompor. Read more on business and sign up for our business newsletter.