Auto loan defaults at 10-year high


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With prices increase and real wages fall, many Americans are struggling to make ends meet. They are increasingly turning to credit cards and other debt to fill the void. But this creates other problems. Debt needs to be repaid and a growing number of Americans are struggling to keep up with payments.

Defaults on auto loans have reached their highest level in more than 10 years, according to TransUnion.

TransUnion tracks over 81 million auto loans in the United States. According to the consumer credit bureau, 1.65% of auto loans were at least 60 days past due in the third quarter. This is the highest rate of delinquencies over 60 days in more than a decade.

Satyan Merchant, Senior Vice President of TransUnion told CNBC inflation was making it difficult for people to keep up with their car payments.

Consumers always want to stay informed as best they can. It’s just that this inflationary environment makes it difficult. This leaves less money in their pockets to pay off the car loan, as they have to pay more for eggs, milk and other things.

Unsurprisingly, subprime borrowers have the hardest time keeping up with their payments.

Thanks to the accommodation loan programs put in place during the pandemic, some borrowers have managed to avoid defaults. At the end of these programs, arrears increased. Merchant told CNBC that these programs pushed some offending into the future.

According to TransUnion, 200,000 borrowers who took advantage of pandemic-era auto loan shelter programs are now listed as 60 days past due.

Like mortgage rates, auto loan rates have risen significantly since the Fed began raising rates to fight inflation. The average interest rate on new vehicle loans rose to 5.2% in the third quarter. Interest rates on used vehicle loans average 9.7%. Combined with the rising cost of new and used vehicles, as well as rising fuel prices, the cost of owning a car continues to rise dramatically.

Merchant told CNBC that an increase in unemployment would create a larger increase in auto loan delinquencies.

If we get into a position where employment starts to be a challenge in the United States and unemployment goes up, that’s when the industry will really start to worry about a consumer’s ability to pay off his car loan.

The Federal Reserve burst an auto bubble with years of artificially low interest rates after the 2008 financial crisis. The air was coming out of this bubble as the Fed tightened interest rates in 2018. The Fed’s pivot in 2019 and then the return to zero percent interest rates during the pandemic breathed new air into the deflated bubble, but with the Fed tightening monetary policy again, the air seems to be flowing.

This is another example of how the combination of inflation, rising interest rates, and a deteriorating economy is having a negative impact on the average American. We see the same dynamic emerging in other sectors, including accommodation. This sends out warning signals that things in the economy could deteriorate very rapidly in the near future as this deterioration worsens and snowballs.

For now, U.S. consumers are managing to limp on credit and savings built up during the pandemic. But savings run out quickly and debt has limits.

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