In a blog post Monday, the Consumer Financial Protection Bureau flagged the rate at which loans for recently purchased cars have been going delinquent. From the post (emphasis added):
When looking at delinquency in the first two years after purchase, loans originated in 2021 and 2022 are starting to show higher delinquency rates relative to loans originated in previous years, even when compared to loans unaffected by pandemic-related stimulus payments. For example, auto loans originated in 2021 have a delinquency rate of 0.67% in the sixth quarter after origination, which is 13% higher than the delinquency rate of auto loans originated in 2018.
The authors noted the trend was worse for subprime (credit scores between 580 and 619) and deep subprime (credit scores below 580) borrowers.
To address higher prices, car dealers lengthened the terms of auto loans to help make monthly payments more manageable for buyers. But it wasn’t enough to offset surging prices.
It’s never good to fall behind on debt payments. But it can be uniquely bad to go into delinquency with auto loan payments.
People need their cars for essential tasks like going to work and buying groceries. So drivers have a strong incentive to keep current on loan payments. Because if you fall too far behind, your car can get repossessed.
This is why auto loan delinquency rates are worth watching very closely. A sharp rise is a sign of real economic pain, reflecting lost jobs, weak wage growth, and the consequences of high inflation.
While rising delinquency rates may reflect borrowers’ struggles, it’s a phenomenon that corrects itself.
As more borrowers go into serious delinquency, more cars get repossessed. And as more cars get repossessed, more supply enters the used car market. And when more cars enter the used car market, prices come down.
That said, it’s a trend worth following closely. From the CFPB:
Recent data show that the rate of transition into delinquency, especially for low-income borrowers, has risen over the past year. This rise could simply be a return to pre-pandemic levels resulting from the end of pandemic-related stimulus policies. However, inflationary pressures could mean the costs of car ownership are outpacing income growth for some consumers with auto loans. While we cannot fully infer the contribution of either of these possible explanations to the rise in delinquency rates, we cannot ignore the relationship between larger loan amounts and increasing interest rates to consumer’s monthly budgets and some consumers’ struggle to stay current on their loans.
