Consumers are increasingly falling behind on their loan payments, and economists say the problem will only get worse as the recession continues to wipe out jobs at an unrelenting pace (”Consumers Fall Behind on Loans at Record Rate,” USA Today, April 6, 2009).

According to the Federal Reserve, a record 4.2 percent of consumer loans were at least 30 days delinquent in the fourth quarter and another 4 percent of consumer loans went into default during that same period. Data from the American Bankers Association and the investors service firm Moody’s Economy reflects an economic outlook for the rest of the year that isn’t much better: More consumers are paying late or not at all on their home, car, and credit card loans.

“The wheels have fallen off the economy,” says James Chessen, chief economist for the American Bankers Association. “There have been significant job losses and that translates into people having a hard time paying their bills.”

Unemployment to Blame

This year alone, the recession has claimed more than 2 million jobs, bringing the total number of jobs lost to the recession since it began in December 2007 to a walloping 5.1 million. And along with these job losses has come an increase in the number of loan defaults as families find it harder to pay their bills, says Joel Naroff, founder of Naroff Economic Advisors, an economic consulting firm.

With the added financial stress of income loss, more consumers, in a reversal of their typical behavior, are choosing to repay their credit cards and auto loans before their mortgages. Many of these consumers are underwater in their homes – owing more on their home than it’s worth – and may be giving up on paying their home loans to focus more on repaying their other debts, says Mark Zandi, chief economist at Moody’s Economy.

But the situation is expected to worsen, Zandi says. Charge-offs – uncollectable credit card balances that a bank writes off as a loss – should reach 10 percent by the first quarter of 2010, up from the current rate of 6.3 percent.

Zandi says, “I don’t think there’s … any loan category that will avoid this storm.”

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