Mortgage, auto loan.
That’s how cash-strapped consumers prioritized their bills until the downturn pushed them to pay auto loans first so they could get to work, according to conventional wisdom throughout the lending industry.
But that wisdom is wrong, according to the latest version of TransUnion’s Payment Hierarchy Study, released today. The study explores how households prioritize their bills when they fall behind on payments.
TransUnion’s latest research shows that distressed customers have been putting their auto loans at the front of the line for payment for at least a decade, well before the Great Recession started in December 2007.
The extended timeline puts a crimp in the industry’s analysis of why data show customers pay auto loans first, according to Ezra Becker, co-author of the study and vice president of research and consulting for TransUnion in Chicago.
The auto-loan priority was first documented by TransUnion in its 2012 Payment Hierarchy Study. The study, which covered 2007 to 2011, found that when customers couldn’t afford to pay all their bills, statistically they were more likely to pay their auto loan first, ahead of credit cards and the mortgage.
That finding holds in the study released today. What doesn’t hold, according to Becker, is the conventional industry wisdom that the auto-first order in the 2012 study was unusual. Lenders assumed that historically customers paid their mortgage first. The thinking was that the Great Recession changed that because home prices fell so low, so fast. Customers needed their cars to get to work, but they didn’t see the point of staying current on their mortgages, the reasoning went.
“In fact, that was not correct,” Becker told Automotive News during a phone interview on Monday.
For the study released today, TransUnion expanded the time frame to cover 2003 to 2013. It turns out that over the entire period, repaying the auto loan was the No. 1 priority. The Great Recession didn’t change that priority after all, Becker said. “Auto loans were always the first payment made,” he said.
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