Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by offering you interactive tools and financial calculators as well as publishing original and objective content, by enabling users to conduct research and analyze data for free – so that you can make informed financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this site are from companies that compensate us. This compensation may impact how and when products are featured on this site, including for instance, the order in which they appear within the listing categories, except where prohibited by law for our mortgage home equity, mortgage and other home loan products. But this compensation does affect the information we publish, or the reviews you see on this site. We do not cover the vast array of companies or financial offerings that might be available to you. SHARE: Massimo colombo/Getty Images
3 min read . Published March 02, 2023.
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in navigating the details of borrowing money to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing concise, well-studied information that simplifies complicated topics into bite-sized pieces. The Bankrate promises
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We receive compensation for placement of sponsored products or services, or when you click on specific links on our website. This compensation could impact how, where and in what order products are displayed within the categories of listing and categories, unless it is prohibited by law for our mortgage, home equity, and other home loan products. Other factors, like our own rules for our website and whether or not a product is available within your area or at your self-selected credit score range may also influence how and where products appear on this site. We strive to provide an array of offers, Bankrate does not include the details of every financial or credit product or service. While the prices of cars have been , automobile loan delinquency rates have been extremely low in the initial two years of the pandemic. This isn’t any longer the case. As the works to address the rising cost of living, more borrowers are falling behind on their auto loans — and we can expect the delinquency rate to rise back to pre-pandemic levels when we reach the end of 2022. Delinquency rates in 2022 continue to rise . The positive credit trends during the pandemic are now returning to normal levels, exemplified by the auto loan performances this month. According to Cox Automotive’s weekly insight in the beginning of October, loans that are more than 60 days late are increasing — up 30.8 percent from the previous year. However, “normal” does not always mean that it’s a good thing. As these numbers show, rates of delinquency are inching up each monthespecially for drivers who are subprime. These borrowers are directly affected by inflation and are more vulnerable to lenders. In the present, it is essential to keep up-to-date on your loan payments to avoid the risk of defaulting upon your loan as well as losing your car. The positive side is that the increased amount of delinquencies have not yet led to an increase in the number of people in default on their loans in the pre-pandemic level. However, the availability of vehicles and credit access are likely to alter the landscape when 2022 draws to an end. Focus on the big image While it’s true that delinquency rates are on the rise however, it is essential to look at the reasons that have led to this increase. This is primarily due to an issue of demand and supply which is the primary driver of the price rise in the auto industry. With lower inventory and higher demands, higher priced vehicles have higher rates, 6.07 and 10.26 percent for used and new vehicles, respectively, according to . But Satyan Merchant is Senior vice-president and automotive business manager at TransUnion, warns to consider the larger picture in relation to auto delinquencies after the “Critical Eye on Auto Performance, released in mid-October. Merchant notes that “while point-in-time delinquency rates are higher compared to prior times, we have seen quite stable performance from the past.” So, this rise in delinquency is not unusual when viewed on a larger economic scale. The report also found that general performance was similar to 2019 rates, an encouraging indicator. An eroding “denominator” Another influential factor that is causing the rise in delinquency rates is something TransUnion refers to as “the shrinking denominator.” This is due to the number of vehicles that are being financed -far less than in the past. This is due to fewer originations in 2020 which continued fall due to the an insufficient supply of vehicles and an increase in vehicle repossession in 2021 and 2022. These factors have combined to create an “imbalance between the volumes of originations and runoff of total accounts, which results in a lower outstanding total account quantity,” found TransUnion. What was the reason that kept auto loan delinquency rates constant? Data from February 2022 shows that government assistance helped play an essential role in keeping delinquency rates stable over the past two years. Because many of the Americans receiving extra assistance during this period also fall under the subprime category this resulted in lower loan originations and lower delinquency rates. Insufficient loan originations Across all categories, the majority of auto-delinquencies originate from borrowers with low credit scores. So, with fewer low-credit borrowers getting new loans the delinquency rate remained relatively low. A lot of low-credit borrowers were unable to finance new loans because of the lower demand for vehicles with stay-at-home orders and more stringent acceptance requirements that lenders have implemented. The data from the most recent Fed meeting confirm this belief. Much of the end of 2020 and beginning of 2021 were made up of a smaller number of loan originations. These “missing beginnings” – as the Fed described them — led to lower delinquency rates. If those who tend to fall subject to repossession or in default on their loans do not have loans and settling their debts, it will result in fewer delinquencies. This, in conjunction with federal aid and lenders providing leniency to payments, meant fewer delinquent loans and loan originations. Less subprime borrowers fall between 501 and 600 According to Experian. For the quarter ending March 2022, total loans and leases taken out by subprime borrowers of all kinds- including deep subprime -drops to under 16 percent. Separated out, deep subprime hit an all-time low at 1.85 percent. What can you do to ensure that you don’t fall behind on your auto loan It’s hot this moment, so it could be a viable option to save money. But if you decide to take out a loan with a shorter duration generally, it’s best to pay a substantial amount to prevent unmanageable monthly installments. If it is challenging to make your monthly payment, you might consider the possibility of refinancing your loan. Remember that extending your loan term will also increase the amount of interest that you pay throughout the term that you take out the loan. By purchasing a used vehicle, drivers can own a high-quality vehicle at less cost. Since new vehicles are prone to depreciation within the first two years it is more likely that you will avoid being on the loan and owing more than it’s worth. The bottom line Delinquencies are low in the initial two years of the pandemic. The main reasons behind the lower rates of default are lower borrowers, and more assistance from the government for borrowers who would normally be struggling to make payments. With aid ending and increasing the number of people in search of automobiles — and by extension, financing — there will likely see a steady rise in delinquencies over 2022. This is an indication of the ending of federal aid but not necessarily a an alarm signal. Find out more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ways and pitfalls of borrowing money to purchase cars. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing well-written, clear facts that break down otherwise complicated subjects into bite-sized pieces.
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