NEW YORK (MainStreet) -- There seems to be a hierarchy attached to consumer bill payments, with auto loans at the top of the totem pole. Why? And what bills get paid next? A new study from Transunion has some answers.
The study – actually an extension of Transunion’s Payment Hierarchy study from 2011 – shows that consumers place a big priority on paying their credit card bill before their mortgage, but interestingly, also pay their auto loan before their credit card bill despite the fact that their auto loan has a lower interest rate.
TransUnion researchers believe that American consumers see transportation as a big deal in their lives. To a lesser extent, they figure they can deal with a late mortgage payment, but paying their car loan late really puts them in financial jeopardy.
Evidently, remaining current on an auto loan trumps staying current on a credit card or mortgage debt.
"The reversal in payment patterns between credit cards and mortgages has been well documented, but our findings were illuminating because it had not been previously clear that auto loans were considered a higher priority by consumers than both credit cards and mortgages," explains Ezra Becker, a vice president of research at TransUnion, in a statement. "With unemployment remaining high and real estate values remaining stagnant or further depreciating, consumers continued to pay their credit cards ahead of their mortgages. However, the importance of their auto loans appears to have trumped even the value they place on their credit cards."
In a quarterly analysis of 4 million Americans' bill payment habits TransUnion breaks down the debt priority ratio like this:
- Delinquent on an auto loan while current on credit cards and mortgages = 9.5%
- Delinquent on a credit card while current on auto loans and mortgages = 17.3%
- Delinquent on a mortgage while current on auto loans and credit cards = 39.1%
Those numbers tell quite a story. By more than a four-to-one margin, Americans were more likely to be late on a mortgage payment than on a car payment.
TransUnion offers some unique analysis on why consumers would choose to pay a car loan over a home loan:
- The employment factor. Like it or not, consumers need their cars to get to work – or there won’t be any money to pay their mortgage or credit card bills.
- The repossession factor. TransUnion says that a car loan is not a revolving loan, and the repossession of a car is much worse for consumers than losing a credit card for non-payment.
- Equity holds up. Unlike their homes, which have dried up, equity-wise, U.S. consumers still feel they have equity in their vehicles after a few years of ownership, and want to keep feeding that equity by paying the auto loan on time.
Regionally, states like Michigan and Florida, which have both suffered home value losses, and are big on auto ownership, are more likely to have residents choose to pay an auto loan over a home loan. In states like Texas, where home values have held up better, consumers are less likely to pay a car loan over a home loan or credit card debt.
The TransUnion study says something about how Americans view the economy these days. Short of buying a motor home, where you can live and drive at the same time, U.S. consumers see more value in their cars and trucks, and less value in their homes, and are making decided choices about which to pay for first.
That mindset favors a car loan or over a home loan, and by TransUnion’s numbers, by a wide margin.