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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 decisions by providing you with interactive financial calculators and tools as well as publishing original and objective content. We also allow users to conduct research and analyze data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this website come from companies who pay us. This compensation can affect the way and when products are featured on this site, including, for example, the order in which they appear within the listing categories, except where prohibited by law for our mortgage or home equity products, as well as other home lending products. This compensation, however, does have no impact on the content we publish or the reviews that you read on this site. We do not contain the universe of companies or financial offerings that might be available to you. SHARE: Massimo colombo/Getty Images
3 minutes read Read Published March 02, 2023
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in navigating the ins and outs of securely borrowing money to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain confidence to take control of their finances with precise, well-studied and well-researched data that simplifies complex topics into manageable bites. The Bankrate promises
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If you have questions about money. Bankrate has the answers. Our experts have been helping you master your finances for over four years. We continually strive to provide our readers with the professional advice and tools needed to make it through life’s financial journey. Bankrate follows a strict , so you can trust that our content is truthful and accurate. Our award-winning editors, reporters and editors create honest and accurate information to assist you in making the best financial decisions. The content we create by our editorial staff is factual, objective, and not influenced by our advertisers. We’re honest regarding how we’re capable of bringing high-quality information, competitive rates and practical tools for you , by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the promotion of sponsored goods and, services, or by you clicking on certain links posted on our website. So, this compensation can influence the manner, place and in what order products appear within listing categories in the event that they are not permitted by law. We also offer credit, mortgage, and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in the area you reside in or is within your own personal credit score may also influence how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include details about each credit or financial product or service. While vehicle prices have been rising, auto loan delinquency rates have remained quite low during the initial 2 years following the outbreak. Unfortunately, this is no any longer the case. In the wake of efforts to combat growing inflation, more borrowers are falling behind 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. The delinquency rate for 2022 is expected to rise The strong credit conditions during the pandemic are now returning to normal levels, exemplified by the auto loan performance this month. According to Cox Automotive’s weekly insight in the beginning of October, loans that are more than 60 days late have increased — up 30.8 percent from the year ago. However, «normal» does not always mean that it’s a good thing. As these numbers show, the rates of delinquency are accelerating up each monthespecially for drivers who are subprime. Subprime borrowers are those most directly affected by the rise in inflation and will be more susceptible to lenders. It is crucial to keep up-to-date with your loan payment in order to avoid the risk of defaulting on the loan as well as losing your vehicle. The good thing is that these increased delinquencies have not yet led to an increase in the number of motorists in default on their loans in the pre-pandemic level. However, the availability of vehicles and credit access could alter the situation as 2022 comes to the end of the year. Focus on the big image While it’s true that delinquency rates are increasing, it is important to think about the causes that are driving this increase. Due primarily to an issue of demand and supply, which remains the main influence of the rising cost of living in the automotive sector. With fewer inventory and more demands, higher priced vehicles result in higher prices, 6.07 and 10.26 percent, for new and used cars respectively, according to . But Satyan Merchant is executive vice president, senior director of business and automotive business director at TransUnion, warns to take a look at the bigger picture in the context of auto delinquencies following the «Critical Eye on Auto Performance release in mid-October. Merchant says that «while points-in-time rates of delinquency are higher when compared to prior times, we have seen fairly stable vintage performance.» Therefore, this rise in delinquency is not unusual when considered on an economic scale. The report also found that overall performance was comparable to the rates of 2019, which is a positive sign. The shrinking «denominator» Another factor that is causing the rise in delinquency rates is what TransUnion refers to as «the shrinking denominator,» It is a reference to the number of cars that are being financedfar less than in the past. This is due to fewer originations in 2020 that continued to fall due to the an insufficient supply of vehicles and the increase in repossessions of vehicles in both 2021 as well as 2022. The two factors are combining to result in an «imbalance between origination volumes and total account runoff , which results in a lower outstanding total account volume,» found TransUnion. What is the factor that has 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. Because many of the Americans receiving extra assistance during this period also fall under the subprime category which resulted in lower loan originations as well as delinquency rates. Insufficient loan originations across all categories, the majority of auto delinquencies are incurred by borrowers with low credit scores. Therefore, with fewer low-credit borrowers getting new loans, delinquency rates remained fairly low. Many low-credit borrowers did not finance new loans due to a lower demand for vehicles that had stay-at-home-orders and more strict acceptance criteria implemented by lenders. The findings following the recent Fed meeting confirm this belief. The majority of the period between 2020 and the beginning of 2021 were made up of a decrease in loan originations. This «missing initializations» — as the Fed defined them — resulted in lower delinquency rates. If those who tend to fall subject to repossession or in default on their loans do not have loans, fewer delinquencies will occur. This, along with federal assistance and lenders providing leniency to payment terms, resulted in fewer late loans and loan originations. Fewer subprime borrowers Subprime borrower ranges from 501 to 600, according to Experian. For the quarter ending March 2022 the total loans and leases taken out by all subprime borrowersincluding deep subprimedrops to under 16 percent. Separated out, deep subprime hit an all-time low of 1.85 percent. How to avoid falling behind in your car loan This is a hot topic right now so can be a great alternative to save money. However, if you opt to take out a loan with a shorter duration generally, it’s recommended to take out a larger loan to prevent unmanageable monthly installments. In addition, if it becomes challenging to make your monthly payment, consider changing the terms of your loan. Keep in mind that extending your loan term will also increase how much interest you pay over the life of the loan. If you purchase a used car you can get a high-quality vehicle at a much lower price. And, since new cars appreciate quickly within the first few years or so, you’re more likely to avoid being on the loan and paying more than the value. In the end, delinquencies have been at a low level through the initial two years of the pandemic. The principal reasons for the lower default rates are the fewer borrowers and more government assistance for borrowers who would normally be struggling to make payments. With aid ending and increasing the number of people looking for vehicles — and by the extension, financing there is likely to be a steady increase in delinquencies over 2022. This is a representation of the end of federal aid and is not necessarily cause for alarm. Learn more
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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 borrowing money to buy an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are enthusiastic about helping readers get the confidence to take control of their finances through providing clear, well-researched details that cut otherwise complex topics into manageable bites.
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