Auto Loan Delinquencies Rise to Highest Level in a Decade as Borrowing Costs Rise

New vehicles are parked in storage lots near the the Stellantis Detroit Assembly Complex in Detroit on Oct. 5, 2022. Paul Sancya/AP Photo

The number of Americans failing to pay their auto loans has risen to the highest level in a decade as borrowing costs rise.

Credit agency TransUnion tracks more than 81 million auto loans throughout the United States.

It announced that 1.65 percent of auto loans, or 200,000 customers, were at least 60 days behind their payments in the third quarter, which is the highest rate of delinquencies in over a decade.

The Federal Reserve’s move to fight growing inflation has forced it to raise interest rates, causing a growing number of Americans to fall behind in paying off their debts.

“Consumers still want to stay current as best that they can. It’s just this inflationary environment is making it challenging,” Satyan Merchant, senior vice president of TransUnion, told CNBC.

“It leaves fewer dollars in their pocket to make the auto loan payment, because they’ve got to pay more for eggs and milk and other things.”

Most of those receiving extra assistance during the pandemic were subprime borrowers with poor credit scores in the lower income bracket.

Many of them took advantage of pandemic-era assistance and relief from the federal and state governments.

Salaries have also not been keeping pace with inflation, which are cutting into car sales.

The affordability of a new car from August 2019 to August 2022 fell by 13.3 percent, while used car affordability declined by 26.7 percent during that same period, reported Fox News.

Delinquencies Soar as Stimulus Money Runs Out

The government stimulus checks and loan accommodation programs set up during the pandemic enabled many borrowers to pay off their monthly car loans, lowering delinquency rates for over two years, according to Bankrate.

One of the key programs set up to assist car buyers under financial stress helped them keep their vehicles from repossession because of late monthly payments.

There are still around 100,000 borrowers, more than 60 days delinquent, who remain participants in government loan accommodation programs.

Most of the money from the pandemic assistance programs has largely been spent and as a result, non-repayment rates will likely reach pre-pandemic levels toward the end of the year, Bankrate said.

“There has been this effect where the delinquency that may have occurred over the last few years is really just pushed out or delayed because that consumer didn’t have to make payments or their status was on an accommodation. So now some of those are hitting,” said Merchant.

However, he still believes that the auto loan market remains healthy, despite the spike in delinquency rates.

Meanwhile, TransUnion reported that the average borrowing rate for a new auto loan had risen to 5.2 percent in the last quarter, while the average rate for a used vehicle loan hit 9.7 percent.

Both categories rose more than 1 percentage point year over year, according to the credit agency.

Merchant noted that the rise in interest rates had pushed many car buyers into extending the terms of their loans to a length of at least seven years.

He also said that for now, the number of buyers unable to pay their car loans will be somewhat kept under control by the continuously low jobless rate.

“If we get into a position where employment starts to be a challenge in the United States and unemployment increases, that is when the industry will really start to be concerned about a consumer’s ability to pay their auto loans,” he said.