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 offering you interactive tools and financial calculators as well as publishing original and objective content. We also allow you to conduct research and analyze data for free to help you make informed 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 Earn Profit The deals that are advertised on this website are provided by companies that compensate us. This compensation can affect the way and when products are featured on this site, including, for example, the sequence in which they appear in the listing categories, except where prohibited by law. This applies to our mortgage, home equity and other home lending products. But this compensation does have no impact on the content we publish or the reviews you see on this site. We do not cover the universe of companies or financial offerings that might be available to you. SHARE: Massimo colombo/Getty Images
3 min 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 understanding the ins and outs of securely taking out loans to buy a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances through providing precise, well-studied and well-researched data that breaks down complicated topics into bite-sized pieces. The Bankrate promise
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We receive compensation for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may influence the manner, place and in what order items are displayed within the categories of listing in the event that they are not permitted by law. We also offer mortgage, home equity, and other products for home loans. Other factors, like our own proprietary website rules and whether the product is available in your area or at your personal credit score can also impact how and when products are featured on this site. While we strive to provide an array of offers, Bankrate does not include information about each credit or financial item or product. While vehicle prices have been , automobile loan delinquency rates were extremely low in the initial two years of the pandemic. However, that is no anymore. As the works to address growing inflation, more consumers are being unable to pay their auto loans and we can expect the delinquency rate to be back to pre-pandemic rates at the close of 2022. The delinquency rate for 2022 is expected to rise The strong credit trends that were evident during the pandemic are now returning to normal levels, as evidenced by the improvement in auto loan results this month. According Cox Automotive’s weekly report from the beginning of October loans that are more than 60 days late have increased by 30.8 percent from the previous year. But normal does not necessarily mean that it’s a good thing. As these numbers show, the rates of delinquency are accelerating higher each coming month -particularly for drivers with subprime credit. Subprime borrowers are those most directly affected by inflation and are more vulnerable to lenders. Currently, it is vital to keep up-to-date on your loan payment in order to ensure that you do not default upon the loan or losing your vehicle. The good news is that the increased amount of delinquencies haven’t yet resulted in an increase in the number of motorists defaulting on their loans in the pre-pandemic level. But vehicle availability and credit access are likely to alter the landscape when 2022 draws to the end of the year. Be aware of the bigger picture While it is true that the rate of delinquency is increasing however, it is essential to look at the reasons which are causing this rise. It is due to a problem of supply and demand which remains the main influence of the price rise in the automobile sector. With less inventory and increased demand, more expensive vehicles mean higher rates, 6.07 and 10.26 percent in the case of used and new cars respectively, according to . However, Satyan Merchant is Senior vice-president and business manager at TransUnion advises us to look at the big picture when it comes to auto delinquencies after the “Critical Eye on Auto Performance release in mid-October. Merchant says that “while the rates of point-in-time delinquency are elevated when compared to prior periods, we have observed fairly stable vintage performance.” This increase in delinquency is normal when seen on an economic scale. The report also showed that overall performance was comparable to rates in 2019, which is an encouraging indicator. The shrinking “denominator” Another influential reason for the rising rates of delinquency is what TransUnion calls “the shrinking denominator.” This relates to the number of vehicles that are being financed- much lower than previously. This is due to lower originations in the year 2020, which continued to fall due to the shortages of vehicles, and an increase in vehicle repossession in 2021 as well as 2022. All of these factors create an “imbalance between origination volumes and runoff of total accounts, which results in lower total outstanding account amount,” found TransUnion. What was the reason that kept automobile loan delinquency rates stable? Data from February 2022 shows that government assistance helped play an important role in keeping delinquency rates constant over the last two years. Because many of the Americans receiving extra assistance during this period also fall into the subprime category, it meant less loan originations and lower delinquency rates. The absence of loan originations across all categories, the majority of auto delinquencies come from those with poor credit scores. Thus, with less people with low credit scores getting new loans and delinquency rates remaining fairly low. A lot of low-credit borrowers were unable to have to finance new loans due to less demand for vehicles with stays-at-home purchases and the more strict acceptance criteria implemented by lenders. The results of the recent Fed meeting reinforce this assumption. A large portion of the time between 2020 and the beginning of 2021 was comprised of a smaller number of loan originations. The “missing initializations” — as the Fed defined them — resulted in lower delinquency rates. If drivers that tend to be subject to repossession or defaulting on their loans do not have loans less, there will be fewer defaults. This, along with federal assistance and lenders offering leniency on payment terms, resulted in fewer late loans and loan 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, the total loans and leases made by subprime borrowers of all kindsincluding deep subprimedrops to under 16 percent. If they are separated out deep subprime was able to hit the record low rate at 1.85 percent. How can you avoid being in debt on your auto loan The is hot right now so can be a good alternative to save money. However, if you opt to take out a loan with a shorter term, then it is usually recommended to take out a larger loan to prevent unmanageable monthly installments. In addition, if it becomes difficult to pay your monthly payments, think about refinancing your loan. Be aware that the length of your loan term will also increase your interest rate you have to pay over the course of the loan. By purchasing a used vehicle, drivers can own a high-quality vehicle at a much lower price. Since new vehicles are prone to depreciation within the first few years or so it is more likely that you will stay away from being on the loan — having to pay more than what it’s worth. In the end, delinquencies have been at a low level through the initial two years of the pandemic. The primary reasons for the lower rate of default are the fewer borrowers and the increased assistance from government to borrowers who typically be struggling to make payments. As assistance ends and more people looking for automobiles — and by the extension, financing there is likely to be an increase in delinquencies over 2022. This is an indication of the end of federal assistance, and not necessarily cause for concern. Learn more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ins and outs of securely borrowing money to buy cars. 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 enthusiastic about helping readers achieve confidence in taking control of their finances by providing clear, well-researched information that breaks down complicated topics into digestible pieces.
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