Delinquencies on Automotive Loans Reach Recession-Era Highs
The automotive industry has been hit hard by the COVID-19 pandemic, and it seems that the effects are still being felt. According to an assessment released by S&P Global Mobility, delinquencies on automotive loans have surpassed the recession-era highs witnessed in 2009. The report shows that vehicle loans more than 60 days past due settled around 1.69 percent over the first three months of 2023, which is higher than the recession-era high of 1.46 percent in 2009 and 2010.
Subprime Borrowers are Most Affected
Fortunately, the wealthy will be largely unaffected by this trend, as the issue is isolated primarily to subprime borrowers. For some strange reason, people with more money are having less trouble paying their bills on time. The increased delinquency rate could be attributed to inflation and high-interest rates, but that’s just fancy talk for poor people getting kicked in the rear end.
Interest Rate Rise is Squeezing Monthly Budgets
The interest rate rise is squeezing the monthly budget for the average American consumer. Consumers set aside money monthly for housing, vehicles, and insurance, but may not pay other obligations with the same frequency, such as medical bills and credit cards. People need their vehicles to get to work to make money and pay their obligations.
Lenders Retreat from Subprime Tier
The pandemic saw many lenders retreat from the subprime tier, which made up just 12.3 percent of account volume in the first quarter of 2021 and 12.9 percent in the first quarter of 2022, before recovering to 14.2 percent for the first three months of this year. Subprime volumes hovered around 15 percent before the pandemic.
High Delinquency Rate Encourages Tighter Underwriting Standards
According to TransUnion/S&P Global Mobility AutoCreditInsights, the high delinquency rate has encouraged captive finance companies, banks, credit unions, and independent lenders to tighten underwriting standards. Combined with high interest rates and lower used-car inventories, this has led to a decrease in loan originations. There were 15.3 percent fewer originations in the fourth quarter of 2022 than in the same quarter of 2019, according to S&P Global Mobility.
Auto Loans Becoming a Massive Headache for Consumers
Loans from the new-vehicle segment are reportedly doing better overall. But that’s not much of a comfort when sales are still depressingly low. Americans have taken on significantly more debt to purchase vehicles in recent years. Data from the Federal Reserve estimates that the average automotive loan is up 41 percent since 2019, accounting for an increase of roughly $24,000. That’s massive and predominantly pertains to younger drivers. An estimated one in five members of Generation Z have claimed that their car payment accounts for over 20 percent of their income. Millennials have it almost as bad, and the two groups accounted for a whopping $20 billion in automotive debt falling 90-plus days behind through 2022.
Conclusion
In conclusion, delinquencies on automotive loans have reached recession-era highs, with subprime borrowers being most affected. The interest rate rise is squeezing monthly budgets, and lenders are tightening underwriting standards due to the high delinquency rate. Auto loans are becoming a massive headache for consumers, with Americans taking on significantly more debt to purchase vehicles in recent years. It remains to be seen how the automotive industry will recover from this crisis, but it is clear that changes need to be made to prevent a repeat of this situation in the future.
