Auto Loan Payment Schedules – What if…

What if there was an auto loan with a customizable repayment schedule based on fluctuations in borrowers’ monthly income and expense?

Access to reliable transportation is crucial to a household’s financial security and opportunity. In many places, public transportation can be limited, slow, or inefficient. Owning a car can increase mobility and efficiency, allowing people to reach their destinations quickly and readily. This ease of travel is particularly beneficial for low-income households, where those with a car were twice as likely to find a job and four times as likely to remain employed.

Paying for a car over time can be especially complex and daunting for people with fluctuating income or expenses—or a combination of both.  Typically, auto loans have a monthly fixed payment. Borrowers have the opportunity to increase the amount of their monthly payment, if they have cash and want to pay their loan off sooner, but they don’t have an ability to pay less and not be penalized when they have less cash.   

As a result of mismatches between income and expenses, many borrowers end up defaulting on their loans. In 2014, 8.4 percent of auto-loan borrowers with weak credit scores who had taken out auto-loans between January through March had missed payments by November.  If this becomes a frequent occurrence, the car may be repossessed, which adversely affects the borrower’s credit score and leaves them without needed transportation.  Buy Here, Pay Here dealerships make auto loans available to people with subprime credit scores; however, these loans have large down payments and high APR’s and do not involve flexible payment structures.  As a result, 25-30% of BHPH loans end in repossession.

Could a variable repayment schedule be predetermined based upon a borrower’s ability to project their varying monthly income and expenses, such as with seasonal work? 

Could a “smart” loan product be designed that uses algorithms to determine payments based upon actual monthly or bi-monthly cash inflows and outflows?

Auto loans that recognizedthe fluctuating income and expenses of financially vulnerable Americans could reduce loan default rates, improve credit scores, and increase access to reliable transportation.

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