Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. This allows users to conduct research and compare data for no cost – so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that are featured on this site are from companies who pay us. This compensation could affect how and where products appear on this site, including for instance, the order in which they may be listed within the categories of listing, except where prohibited by law. Our mortgage home equity, mortgage and other home loan products. However, this compensation will have no impact on the content we publish or the reviews you read on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: Massimo colombo/Getty Images
3 min read Published March 02, 2023
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert with the ins and outs of securely borrowing money to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to manage their finances by providing precise, well-studied and well-researched data that simplifies complex subjects into digestible pieces. The Bankrate promise
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We receive compensation for the promotion of sponsored goods or services, or through you clicking certain hyperlinks on our site. Therefore, this compensation may affect the way, location and in what order products are displayed within the categories of listing and categories, unless it is prohibited by law. We also offer mortgage, home equity, and other products for home loans. Other factors, such as our own proprietary website rules and whether the product is available in the area you reside in or is within your personal credit score can also impact the way and place products are listed on this site. We strive to provide an array of offers, Bankrate does not include details about every credit or financial product or service. While the prices of cars have been , auto loan delinquency rates were extremely low in the initial 2 years following the outbreak. Unfortunately, this is no longer the case. As the works to address the rising cost of living, more consumers are being unable to pay their auto loans — and we can expect delinquency rates to be back to pre-pandemic rates when we reach the end of 2022. 2022 delinquency rates continue to rise . The positive credit trends during the pandemic are now returning to normal levels, exemplified by the auto loan performances this month. According to Cox Automotive’s weekly insight in the beginning of October, loans more than 60 days late have been increasing by 30.8 percent from the previous year. However, normal doesn’t necessarily mean good. As these numbers show, rates of delinquency are inching upwards each monthespecially for drivers who are subprime. Subprime borrowers are those most directly affected by inflation and can be vulnerable to lenders. Currently, it is vital to keep up-to-date on your loan payment to ensure that you do not default in the loan and losing your vehicle. The positive side is that the increased amount of delinquencies haven’t yet led to an increase in the number of motorists who default on their loans in the pre-pandemic level. But the availability of cars and access to credit are likely to alter the landscape when 2022 draws to an end. Concentrate on the big picture . While it is true that delinquency rates are increasing, it is important to think about the causes that have led to this increase. This is primarily due to an issue of demand and supply, which remains the main influence of the rising cost of living in the automotive industry. With lower inventory and higher demand, more expensive cars have higher rates, 6.07 and 10.26 percent for used and new cars respectively, according to . However, Satyan Merchant who is the executive vice president, senior director of business and business leader at TransUnion urges consumers to look at the big picture in relation to auto delinquencies following the “Critical Eye on Auto Performance, released in mid-October. Merchant says that “while points-in-time rates of delinquency are higher comparison to previous periods, we have observed quite stable performance from the past.” Therefore, this increase in delinquency is normal when seen on an economic scale. The report also showed that the general performance was similar to the rates of 2019, which is a positive indication. The shrinking “denominator” Another influential reason for the rising rates of delinquency is something TransUnion calls “the shrinking denominator,” This relates to the number of cars that are being financed — much lower than previously. This is driven by fewer originations in 2020 which continued decline due to shortages of vehicles, and the increase in repossessions of vehicles between 2021 and 2022. These factors have combined to create an “imbalance between the volume of originations and total account runoff , which results in lower total outstanding account quantity,” found TransUnion. What kept automobile loan delinquency rates steady? Data from February 2022 shows that government assistance helped play a key factor in keeping rates of delinquency steady over the past two years. Since a large portion of Americans receiving extra assistance during this time also fall into the subprime classification this resulted in that there was a decrease in loan originations as well as delinquency rates. Missing loan originations across the board, most auto-delinquencies originate from those with poor credit scores. Thus, with less people with low credit scores getting new loans the delinquency rate remained relatively low. Many low-credit borrowers didn’t finance new loans because of the lower demand for vehicles that had stays-at-home purchases and the more strict acceptance requirements that lenders have implemented. The findings following the recent Fed meeting support this view. A large portion of the time between 2020 and the beginning of 2021 was comprised of a decrease in loan originations. These “missing beginnings” — as the Fed stated them led to lower delinquency rates. If those who tend to be subject to repossession or in default on their loans do not have loans, fewer delinquencies will occur. This combined with federal assistance and lenders offering leniency on repayments, led to fewer delinquent loans and originations. Fewer subprime borrowers Subprime borrower ranges from 501 to 600, According to Experian. The third quarter in 2022, the total loans and leases made by subprime borrowers of all kindswhich includes deep subprimeis just below 16 percent. When separated deep subprime was able to hit a record low rate at 1.85 percent. How to avoid falling behind on your auto loan It’s hot in the moment and could be a viable option to save some money. But if you decide to get an loan that has a shorter time typically, it’s best to pay a substantial amount to avoid unmanageable monthly payments. Also, if it becomes difficult to meet your monthly payments, think about changing the terms of your loan. Remember that extending your term can also increase the amount of interest you have to pay throughout the term of the loan. When you buy a used car you can get an excellent vehicle for a much lower price. And, since new cars depreciate quickly in the first two years, you’re more likely to avoid becoming on the loan — paying more than the value. The bottom line Delinquencies have been at a low level through the first 2 years following the outbreak. The main reasons behind the lower default rates are lower borrowers, and the increased assistance from government for those who normally have issues making payments. With assistance ending and more people seeking vehicles — and , by extension, financing — there will likely see a steady rise in defaults over the period 2022-2022. However, this is more of an indication of the ending of federal aid, and not necessarily an alarm signal. Learn more
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The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are enthusiastic about helping readers gain the confidence to take control of their finances by giving clear, well-studied details that cut otherwise complex topics into manageable bites.
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