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 offering you interactive financial calculators and tools that provide objective and original content. We also allow you to conduct research and analyze data for free and help you make sound financial decisions. Bankrate has partnerships with issuers, including 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 may impact how and when products are featured on the site, such as for instance, the order in which they appear within the listing categories, except where prohibited by law. Our mortgage, home equity and other products for home loans. However, this compensation will have no impact on the content we publish or the reviews you see on this site. We do not include the vast array of companies or financial offers that may be accessible to you. SHARE: Massimo colombo/Getty Images
3 min read Published March 02, 2023
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in understanding 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 since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances with precise, well-studied and well-researched data that breaks down complex subjects into digestible pieces. The Bankrate promise
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We receive compensation for the placement of sponsored products or services, or through you clicking certain links posted on our site. This compensation could affect the way, location and in what order items appear within listing categories in the event that they are not permitted by law for our credit, mortgage, and other home loan products. Other factors, like our own rules for our website and whether a product is available in the area you reside in or is within your self-selected credit score range can also impact the way and place products are listed on this website. Although we try to offer the most diverse selection of products, Bankrate does not include information about every credit or financial products or services. While the prices of cars have been rising, the auto loan delinquency rates were extremely low in the initial two years of the pandemic. Unfortunately, this is no any longer the case. In the wake of efforts to combat the rising cost of living, more borrowers are falling behind on their auto loans -- and we can expect the delinquency rate to rise back to pre-pandemic levels as we near the end of 2022. The delinquency rate for 2022 is expected to increase. The robust credit trends that were evident during the pandemic are returning to normal levels, as evidenced by the auto loan results this month. According Cox Automotive's weekly report from early October, loans that are more than 60 days late have been increasing in value -- increasing 30.8 percent from the year ago. However, "normal" does not always mean that it's a good thing. These numbers reveal that the rates of delinquency are accelerating upwards each month- especially for subprime drivers. Subprime borrowers are those most directly affected by the rise in inflation and will be more susceptible to lenders. In the present, it is essential to be current with your loan payment in order to be safe from the possibility of defaulting in the loan as well as losing your vehicle. The positive side is that the increased amount of delinquencies haven't yet resulted in an increase in the number of people in default on their loans in the pre-pandemic level. However, the availability of vehicles and access to credit are likely to alter the landscape in 2022 as the year comes to an end. Focus on the big image While it's true that the rate of delinquency is increasing, it is important to consider the factors that are driving this increase. It is due to a problem of demand and supply, which is still the major driver of price increase in the automotive industry. With lower inventory and higher demands, higher priced cars have higher rates, 6.07 and 10.26 percent, for new and used cars respectively, according to . But Satyan Merchant who is the executive vice president, senior director of business and business manager at TransUnion advises us to consider the larger picture in the context of auto delinquencies following the "Critical Eye on Auto Performance release in mid-October. Merchant points out that "while points-in-time rates of delinquency are higher when contrasted with prior time frames, we have also observed quite stable performance from the past." So, this increase in delinquency is normal when viewed on a larger economic scale. The report also found that the general performance was similar to rates in 2019, which is which is a positive indication. A shrinking "denominator" Another important reason for the rising rates of delinquency is something TransUnion calls "the shrinking denominator." This relates to the amount of vehicles which are being funded -significantly lower than before. This is due to lower originations in the year 2020, which continued to decrease due to a shortages of vehicles, and the increase in repossessions of vehicles in 2021 as well as 2022. These factors have combined to create an "imbalance between the volume of originations and total account runoff results in lower outstanding balance amount," found TransUnion. What kept automobile loan delinquency rates constant? The data from February 2022 suggests that the assistance of the government played a key role in keeping delinquency rates constant over the last two years. Because a lot of Americans who received extra help during this period also fall under the subprime category this resulted in lower loan originations and lower delinquency rates. Missing loan originations across the board, the majority of auto-delinquencies originate from people with low credit scores. Thus, with less people with low credit scores getting new loans and delinquency rates remaining relatively low. Many low-credit borrowers didn't finance new loans due to a 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 decrease in loan originations. The "missing originations" -- as the Fed stated them meant fewer delinquency rates. If drivers that tend to fall subject to repossession or defaulting on their loans do not have loans 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, according to Experian. In the third quarter of 2022 the total loans and leases made by subprime borrowers of all kindsincluding deep subprimedrops to under 16 percent. When separated, deep subprime hit a record low rate that was 1.85 percent. How can you avoid being in debt in your car loan The is hot in the moment and could be a great option to save money. But if you decide to take out an loan with a shorter term generally, it's best to pay a substantial amount in order to avoid paying monthly fees that are too large. In addition, if it becomes difficult to meet your monthly payments, think about changing the terms of your loan. Remember that extending your loan term will also increase your interest rate you pay throughout the term of the loan. When you buy a used car, drivers can own an excellent vehicle for an affordable cost. Since new vehicles are prone to depreciation within the first year or two, 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 have been low through the initial 2 years following the outbreak. The main reasons behind the lower rates of default are lower borrowers, and the increased assistance from government to borrowers who typically be struggling to make payments. With assistance ending and more people looking for automobiles -- and by extension, financing there will likely be a steady increase in defaults over the period 2022-2022. But this is more an indication of the ending 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 specializes in assisting readers with 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 from late 2021. They are enthusiastic about helping readers get the confidence to take control of their finances through providing well-written, clear details that cut complex topics into manageable bites.
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