Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by offering you interactive tools and financial calculators, publishing original and objective content. We also allow you to conduct research and compare data for no cost and help you make financial decisions with confidence. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this website come from companies that compensate us. This compensation can affect the way and where products appear on the site, such as for instance, the order in which they be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other home lending products. However, this compensation will not influence the information we provide, or the reviews that you see on this site. We do not cover the entire universe of businesses or financial offers that may be open 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 specializes in assisting readers in navigating the ways and pitfalls of borrowing money to purchase an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing precise, well-studied and well-researched data that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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Therefore, this compensation may impact how, where and when products are listed in the event that they are not permitted by law. This is the case for our mortgage, home equity and other home loan products. Other factors, like our own website rules and whether a product is offered in the area you reside in or is within your own personal credit score can also impact how and when products are featured on this site. We strive to provide an array of offers, Bankrate does not include the details of every credit or financial item or product. Although the cost of vehicles has been on the rise, the auto loan delinquency rates have remained quite low during the initial 2 years following the outbreak. However, that is no anymore. 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 rise back to pre-pandemic levels at the close of 2022. 2022 delinquency rates continue to increase. The robust credit trends that were evident during the pandemic are now returning to normal levels, exemplified by the auto loan performance this month. According to Cox Automotive’s weekly insights from early October, loans over 60 days past due are increasing — up 30.8 percent from a year prior. But normal does not necessarily mean it’s good. As these numbers show, the rates of delinquency are accelerating upwards each monthparticularly for drivers with subprime credit. Subprime borrowers are those most directly affected by inflation and likely will be more susceptible to lenders. Currently, it is vital to keep up-to-date with your loan payments to avoid the risk of defaulting on your loan and losing your vehicle. The good news is that the increased amount of delinquencies haven’t yet led to an increase in the number of people who default on their loans at levels that were pre-pandemic. But the availability of cars and access to credit could alter the situation in 2022 as the year comes to an end. Be aware of the bigger picture While it is true that delinquency rates are increasing however, it is essential to think about the causes which are causing this rise. Due primarily to an issue of demand and supply which remains the main influence of price increase in the automotive industry. With fewer inventory and more demand, more expensive cars mean higher rates, 6.07 and 10.26 percent for used and new automobiles, respectively, as per . But Satyan Merchant, Senior vice-president and automotive business manager at TransUnion urges consumers to consider the larger picture in the context of auto delinquencies after the “Critical Eye on Auto Performance, released in mid-October. Merchant points out that “while the rates of point-in-time delinquency are higher comparison to previous times, we have seen quite stable performance from the past.” So, this rise in delinquency is not unusual when seen on an economic scale. The report also revealed that general performance was similar to rates in 2019, which is an encouraging indicator. A shrinking “denominator” Another important reason for the rising rates of delinquency is something TransUnion calls “the shrinking denominator.” It is a reference to the number of cars which are being funded — much lower than previously. This is driven by fewer originations in the year 2020, which continued to decline due to limited vehicle supply and then an increase in the repossession of vehicles in both 2021 as well as 2022. All of these factors result in an “imbalance between the volume of originations and runoff of total accounts, which results in a lower outstanding total account volume,” found TransUnion. What is the factor that has kept auto loan delinquency rates stable? The data from February 2022 suggests that assistance from the government played an essential role in keeping delinquency rates constant over the last two years. Because many of the Americans receiving assistance from the government during this period also fall into the subprime category which resulted in lower loan originations and lower delinquency rates. Insufficient loan originations across all categories, the majority of auto delinquencies are incurred by people with low credit scores. Thus, with less lower-credit borrowers receiving new loans and delinquency rates remaining relatively low. A lot of low-credit borrowers were unable to finance new loans because of the lower demand for a vehicle with stays-at-home purchases and the more strict acceptance criteria that lenders are implementing. The findings following the recent Fed meeting confirm this belief. Much of the end of 2020 and start of 2021 consisted of a decrease in loan originations. The “missing originations” – as the Fed defined them — resulted in lower delinquency rates. If drivers that tend to be a target for repossession or defaulting on their loans do not have loans, fewer delinquencies will occur. This, along with federal assistance and lenders offering leniency on payment terms, resulted in fewer late loans and loan originations. Fewer subprime borrowers Subprime borrower ranges from 501 to 600 According to Experian. In the third quarter of 2022 the total loans and leases made by subprime borrowers of all kinds- including deep subprime — falls to just under 16 percent. When separated, deep subprime hit a record low rate at 1.85 percent. What can you do to ensure that you don’t fall behind with your vehicle loan This is a hot topic right now so can be a good alternative to save money. But if you decide to get a loan that has a shorter time typically, it’s best to pay a substantial amount to prevent unmanageable monthly installments. In addition, if it becomes challenging to make your monthly payment, you might consider the possibility of refinancing your loan. Keep in mind that extending your term also increases the amount of interest you have to pay over the life of your loan. When you buy a used car, drivers can own an excellent vehicle for a much lower price. Since new vehicles appreciate quickly within the first few years or so it is more likely that you will avoid becoming on the loan due to owing more than 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 the fewer borrowers and more assistance from the government for those who normally be struggling to make payments. As assistance ends and more people looking for vehicles — and , by extension, financing there is likely to see a steady rise in delinquencies over 2022. But this is more an indication of the end of federal aid, and not necessarily cause for concern. Learn 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 an automobile. 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 their readers get the confidence to take charge of their finances by providing clear, well-researched details that cut otherwise complicated subjects into bite-sized pieces.
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