• In a process called “kicker the trade”, some auto dealers tell people who can’t afford their current auto loan not to pay it and take out a new loan.
• This is a short term solution to a longer term problem, and it could happen more often than anyone would expect, as the the Wall Street newspaper reported.
• The move has an obvious negative effect on customer credit scores, but at least one observer suspects it would attract high-end buyers, not just the poor.

This is not a decision for everyone, but there are apparently a growing number of people who cannot afford their car loans and are simply stopping their payments to buy another car. It’s hard to find exact numbers, but a recent report the Wall Street newspaper found a handful of anecdotes that the practice, known as ‘kicking the trade’, is quietly happening across the country with people signing auto loans they then can’t afford .

The exact number of people who have stopped paying their auto loans at the suggestion of a dealer interested in selling them another car is almost impossible to determine. We know that the average price of new vehicles hovers around $ 35,000. The Federal Reserve Bank of New York (aka the New York Fed) statistics on all auto loans and the number of defaults of these loans and has seen an increasing trend in recent years.

The amount of money underwritten for auto loans has been on the rise since 2010 and topped $ 150 million in the United States for each of the last three quarters of 2019. The number of auto loans that have grown to what the Fed calls “de serious delinquencies “(over 90 days late) has been increasing slowly since 2012, but the total is not as high as during the recession years of 2009 and 2010.

In part, this is because there are simply more auto loans. The New York Fed’s Quarterly US Household Debt and Credit Report, released in February, says auto loans, including newly opened loans and leases, stood at $ 159 billion. dollars in the fourth quarter of 2019, roughly the same as the previous quarter. high level. Likewise, credit agency TransUnion released a report that found auto creations grew 4.3% year-over-year in the third quarter of 2019, adding 7.5 million new accounts. The average balance of those new accounts was $ 22,232, up 3.3% from the same period a year earlier, TransUnion said.

The Fed found in February 2019 that 2018 “marked the highest level in the 19-year history of loan origination data, with $ 584 billion in new auto loans and leases appearing on credit reports, up in nominal terms compared to the $ 569 billion in 2017 “. The Fed said that while much of the growth came from individuals with high credit scores (over 760), given the overall increase in auto loans from 2018, “there is now more subprime auto borrowers than ever before, resulting in a larger pool of high-risk delinquency borrowers. ”

There is a company called Swapalease that helps organize car rental transfers to allow people to transfer an existing lease to another person, a method potentially that avoids the negative effects of simply giving up a lease. Scot Hall, senior vice president of company operations, said Car and driver that he believes that the number of dealers who “start the business” is very low, and he stressed that there are risks for any dealer who tries this strategy. “If a dealership was guilty of inflating a customer’s income on a credit application, serious legal and business consequences would result for that dealership,” he said.

The bottom line is how it affects the person signing on the dotted line, of course. And buyers are ultimately responsible for loan balances, even in the event of default.

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