Car Owners Are Struggling With Their Auto Loans

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

A rising delinquency rate may indicate that households are struggling with debt, especially given that meeting auto loan repayments is a high priority for many households. However, if you’re struggling to meet all your debt repayments, you should consider paying off your most expensive debt first – and for most people, that means credit cards.

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

Almost 3.5% of car loans are overdue

The recent TransUnion study found that, as of Q2 2022, 3.34% of auto loans were more than 30 days past due, 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 increase. First, they point out, there was likely a backlog of backlogs created by the pandemic. Many people who might have fallen behind on their car loan repayments during the pandemic have not done so because of government relief, stimulus programs or car loan providers offering temporary help to their customers.

Second, while the number of car loan defaults is at a five-year high, the total number of car loans has been declining since 2018. This is partly due to limited supply during and immediately after the pandemic, which meant that many customers experienced difficulties. even finding a car to finance. This is also related to the rising cost of new vehicles – the average cost for a new vehicle is above $48,000, a record high.

Car loans are also more expensive due to rising interest rates. In the past month, the weighted average car loan rate across all loan types increased by 2.8 percentage points to 10.6%. People with low credit scores are likely to be hit the hardest by these 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 appears that many people who might have fallen behind on their car loans during the pandemic, but were kept solvent by stimulus payments, are now doing so. At the same time, the total number of car loans is decreasing. Both factors combined mean that the crime 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 obligations – second only to their mortgage repayments, and far more important than credit card repayments.

And, it makes sense. Car loan repayments are associated with a tangible asset – a vehicle – that you already use. Moreover, the rising cost of cars in recent years 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 factors explain why paying off a car loan is considered a high priority in many households.

Consumers should be careful about prioritizing unsecured debt over their car loan. If you’re struggling to keep up with your car loan, your lender may 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 eventually repossess the vehicle if the loan defaults.

As with all forms of debt, falling behind on your payments can adversely affect credit scores, so it’s important to budget appropriately to meet loan obligations.


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