Car Owners Are Struggling With Their Auto Loans

A recent study by TransUnion points to a potentially concerning trend in the auto loan market – delinquency rates are rising. Almost 3.5% of auto loan customers are now behind on their payments.

A rising delinquency rate may indicate that households are struggling with debt, especially since meeting car loan repayments is a high priority for many households. If you’re struggling to meet all of your debt repayments, however, you should consider paying down your most expensive debt first—and for most people, that means credit cards.

  • Almost 3.5% of auto loan customers are now behind on their payments.
  • People who may have missed car loan repayments during the pandemic are able to meet them due to government support and the stimulus program. Now they are falling behind.
  • The total number of car loans in the US it. is decreased due to rising interest rates.
  • While it is important to prioritize high-cost debt, typically credit card debt, auto loans are secured by the vehicle and can involve repossession if payments are not made.

Almost 3.5% of car loans are delinquent

The latest TransUnion study found that as of Q2 2022, 3.34% of auto loans were more than 30 days delinquent, and that 1.43% were more than 60 days late on a payment. This is the highest rate for five years, and a significant increase over the past two years.

TransUnion suggested a number of reasons for this rise. First, they point out, there was likely a backlog of delinquencies created by the pandemic. Many people who may have fallen behind on their car loan repayments during the pandemic did not because of government relief, stimulus programs or car loan providers offering temporary assistance to their customers.

Second, although the number of car loans that are delinquent is at a five-year high, the total number of car loans has decreased since 2018. This is partly due to limited supply during and immediately after the pandemic, which meant that many customers faced difficulties Even find a car to finance. It is also related to the rising cost of new vehicles – the average price for a new vehicle is above $48,000, a record high.

Car loans are also more expensive because of rising interest rates. Over the past month, the weighted average auto loan rate across all loan types increased by 2.8 percentage points to 10.6%. People with low credit scores are likely to be hardest hit by the price increases. In October, a deep subprime borrower with a credit score below 580 saw an average rate of 18.2% on a new vehicle loan and 21.8% on a used vehicle loan.

In short: it seems that many people who could have fallen behind on their car loans during the pandemic, but were kept solvent by stimulus payments, are doing so now. At the same time, the total number of car loans is decreasing. Both factors together mean that the delinquency rate is at an all time high.

Should I prioritize my car loan?

The TransUnion study also revealed some interesting data about how consumers prioritize their payments. The study found that most people consider their monthly car loan payment to be one of their most important financial commitments – just behind their mortgage repayments, and far more important than credit card repayments.

And, that makes sense. Auto loan repayments are tied to a tangible asset—a vehicle—that you already use. In addition, the rising cost of cars over the past year means that many people are actually in a positive loan-to-value position: that is, their car is actually worth more than the loan they took out to buy it. Both of these reasons explain why paying back an auto loan is considered a high priority in many households.

Consumers should be wary of prioritizing unsecured debt over their car loan. If you’re having trouble staying current with your car loan, your lender may be able to offer flexibility on your payments, so you should contact them before you miss a payment. If you miss a payment, your lender will likely impose a penalty, and ultimately repossess the vehicle if the loan goes into default.

As with all types of debt, falling behind in your payments can adversely affect credit scores so it is important to budget appropriately to service borrowing obligations.


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