More 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 customers with auto loans are now behind on their payments.

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

Almost 3.5% Of Car Loans Are Delinquent

The recent 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 rise 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 might have fallen behind on their car loan repayments during the pandemic didn’t because of government relief, stimulus programs, or car loan providers offering temporary help to their customers.

Secondly, 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 had difficulty even finding a car to finance. It’s 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 because of rising interest rates. In the last month the weighted average auto loan rate across all loan types has increased by 2.8 percentage points to 10.6%. People with low credit scores are likely to be hit hardest by these price increases. In October, a deep subprime borrower, with a credit score under 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 may 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 together mean 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 regard their monthly car loan payment as one of their most important financial commitments – just behind their mortgage repayments, and far more important than credit card repayments.

And, this makes sense. Auto loans repayments are associated with a tangible asset – a vehicle – that you are already using. 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 factors explain why paying back an auto loan is regarded as a high priority in many households.

Consumers should be wary of prioritizing unsecured debt over their car loan. If you are having trouble staying current with your car loan your lender may be able to offer flexibility on your payments, so you should reach out to them before missing a payment. If you do 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's important to budget appropriately in order to service borrowing obligations.