Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare information for free and help you make sound financial decisions. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that are featured on this website come from companies who pay us. This compensation could affect how and when products are featured on this site, including for instance, the order in which they may appear in the listing categories and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other home loan products. However, this compensation will affect the information we publish, or the reviews that you see on this site. We do not cover the universe of companies or financial offers that may be accessible 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 in understanding the details of borrowing money to buy an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers gain the confidence to control their finances through providing precise, well-studied and well-researched data that breaks down complex subjects into digestible pieces. The Bankrate guarantee
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If you have questions about money. Bankrate has the answers. Our experts have helped you understand your money for over four decades. We strive to continuously provide consumers with the expert guidance and the tools necessary to make it through life's financial journey. Bankrate adheres to strict standards , so you can trust that our content is honest and reliable. Our award-winning editors and journalists create honest and accurate content to help you make the right financial choices. Our content produced by our editorial team is objective, truthful, and not influenced through our sponsors. We're transparent regarding how we're capable of bringing high-quality information, competitive rates and practical tools for you by explaining how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products andservices or when you click on certain links posted on our website. Therefore, this compensation may affect the way, location and when products are displayed within the categories of listing, except where prohibited by law. We also offer mortgage, home equity, and other home loan products. Other elements, like our own proprietary website rules and whether or not a product is available in the area you reside in or is within your self-selected credit score range may also influence the way and place products are listed on this site. Although we try to offer a wide range offers, Bankrate does not include the details of every financial or credit item or product. While vehicle prices have been on the rise, auto loan delinquency rates have been surprisingly low for the first two years of the pandemic. Unfortunately, this is no any longer the case. As we work to tackle the rising cost of living, more people are becoming indebted on their auto loans and we can expect the delinquency rate to rise back to pre-pandemic levels when we reach the end of 2022. Delinquency rates in 2022 continue to rise . The positive credit trends during the pandemic are now returning to normal levels, as evidenced by auto loan results this month. According Cox Automotive's weekly report in the beginning of October, loans that are more than 60 days past due have been increasing by 30.8 percent from a year ago. But normal does not necessarily mean it's good. As these numbers show, delinquency rates are rising up each monthespecially for drivers who are subprime. Subprime borrowers are those most directly affected by the rise in inflation and can be vulnerable to lenders. It is crucial to stay up to date on your loan payments to ensure that you do not default on the loan or losing your car. The positive side is that these higher levels of late payments haven't yet resulted in an increase in the number of motorists defaulting on their loans at pre-pandemic levels. But the availability of cars and access to credit could alter the situation when 2022 draws to the end of the year. Be aware of the bigger image While it's true that the rate of delinquency is on the rise, it is important to consider the factors that have led to this increase. It is due to a problem of supply and demand which is still the major driver of the price rise in the auto industry. With less inventory and increased expectations, the more costly vehicles result in higher prices, 6.07 and 10.26 percent, for new and used vehicles, respectively, according to . However, Satyan Merchant, executive vice president, senior director of business and automotive business leader at TransUnion urges consumers to take a look at the bigger picture in relation to auto delinquencies following the "Critical Eye on Auto Performance, released in mid-October. Merchant says that "while point-in-time delinquency rates are higher when compared to prior times, we have seen relatively stable performance in the past." This growth in delinquency can be considered normal when viewed on a larger economic scale. The report also revealed that overall performance was comparable to rates in 2019, which is which is a positive indicator. An eroding "denominator" Another influential factor that is causing the rise in delinquency rates is what TransUnion calls "the shrinking denominator." This is due to the number of cars that are being financed -far less than in the past. This is due to lower originations in the year 2020, which continued to decrease due to a shortages of vehicles, and an increase in vehicle repossession in 2021 as well as 2022. All of these factors result in an "imbalance between the volume of originations and total account runoff results in a lower outstanding total account amount," found TransUnion. What is the factor that has kept auto loan delinquency rates constant? Data from February 2022 shows that government assistance helped play an essential role in keeping delinquency rates constant over the last two years. Since a large portion of Americans who received extra help during this time also fall under the subprime classification this resulted in less loan originations and lower delinquency rates. Insufficient loan originations across the board, the majority of auto delinquencies are incurred by borrowers with low credit scores. So, with fewer low-credit borrowers getting new loans the delinquency rate remained fairly low. Many low-credit borrowers didn't get new loans because of the lower demand for vehicles with stay-at-home-orders and more strict acceptance requirements that lenders have implemented. The data from the most recent Fed meeting support this view. The majority of the period between 2020 and beginning of 2021 was comprised of a lower number of loan originations. This "missing originations" -- as the Fed defined them -- led to lower delinquency rates. If those who tend to be subject to repossession or defaulting on their loans are not borrowing and settling their debts, it will result in fewer delinquencies. This, along with federal assistance and lenders offering leniency on payments, meant fewer delinquent loans and originations. Fewer subprime borrowers Subprime are those who have a credit score between 501 and 600 as per Experian. For the quarter ending March 2022, total loans and leases taken out by subprime borrowers of all kindsincluding deep subprime- falls to just under 16 percent. If they are separated out, deep subprime hit an all-time low at 1.85 percent. How to avoid falling behind in your car loan This is a hot topic this moment, so it could be a good option to save some money. But if you decide to get an loan that has a shorter time typically, it's wise to make a large to prevent unmanageable monthly installments. If it is difficult to meet your monthly payment, consider the possibility of refinancing your loan. Keep in mind that extending your term can also increase your interest rate that you pay throughout the term that you take out the loan. If you purchase a used car, drivers can own a high-quality vehicle at less cost. Since new vehicles appreciate quickly within the first two years, you're more likely to avoid being on the loan due to having to pay more than what it's worth. In the end, delinquencies are low in the first two years of the pandemic. The primary reasons for the lower rate of default are fewer borrowers, and the increased assistance from government for those who normally struggle to pay. With aid ending and increasing the number of people looking for automobiles -- and by extension, financing there is likely to see a steady rise in the number of delinquencies that will occur by 2022. This is an indication of the end of federal support, and not necessarily cause for concern. Find out more
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the ways and pitfalls of taking out loans to buy a car. Written 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 providing clear, well-researched facts that break down otherwise complicated subjects into bite-sized pieces.
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