Car Loan Delinquencies Keep Increasing, Who Is to Blame?

Not that you couldn’t have figured this one out all by yourself, but car loan delinquencies are reaching record levels once again. The culprits are the usual suspects. Wages have failed to keep pace with inflation for a couple of generations, current inflation rates are at record highs, and those loan-accommodation programs set up during the pandemic are all expiring now. Basically, regular people are becoming broke so they’re starting to be forced into tough financial decisions – including whether to make their car payments against heating their homes or feeding their families.

We’ve already covered record vehicle pricing, dealer markups, the growing popularity of subprime status, and the fact that average loan terms are becoming comically long. But it’s all coming together like a pileup on the expressway.

On Tuesday, TransUnion reported that the percentage of American loans that are at least 60 days behind in their payments reached 1.65 percent in the third quarter of 2022. That’s roughly 500,000 people who are delinquent and this is the highest rate witnessed in over a decade.

While your author understands that some readers may be skeptical of information coming out of one of the many consumer credit reporting agencies that exist to normalize perpetual debt, TransUnion’s status also means it routinely aggregates information on over one billion individual consumers and has a wealth of data at its disposal.

“Consumers still want to stay current as best that they can. It’s just this inflationary environment is making it challenging,” Satyan Merchant, senior vice president of TransUnion, told CNBC in an interview. “It leaves fewer dollars in their pocket to make the auto loan payment, because they’ve got to pay more for eggs and milk and other things.”

Back in 2017, when the media began noticing that average Americans were being bumped out of the new vehicle market, the average transaction price for an automobile had spiked to $33,200 and the U.S. saw 1.8 million vehicles repossessed. Today, the average transaction price is somewhere around $48,000, according to Kelly Blue Book, with annual repossessions exceeding 2.2 million vehicles.

That’s an unprecedented amount of movement in just five years and primarily impacts high-volume models purchased by regular people. For 2022, the most commonly repossessed vehicles included the Ford F-150, Chevy Silverado, Honda Civic, Honda Accord, Toyota Camry, Nissan Altima, Toyota Corolla, Honda CR-V, and Dodge Ram.

While the sunsetting of loan-accommodation programs put in place during the pandemic is also being faulted by TransUnion, it’s worth noting that these deals were really only there to help consumers buy time while government-supported COVID restrictions were in place and the economy rebounded. But the latter item never really happened, meaning they probably just managed to delay the surging delinquencies we’re now experiencing – something TransUnion seems to agree with.

“There has been this effect where the delinquency that may have occurred over the last few years is really just pushed out or delayed because that consumer didn’t have to make payments or their status was on an accommodation. So now some of those are hitting,” Merchant said.

The credit firm stated that approximately 200,000 auto loans that previously took advantage of the pandemic-era accommodation are now listed as 60 days delinquent. Meanwhile, there are another 100,000 accounts that are more than 60 days delinquent and still in accommodation programs that have yet to end.

Despite this, Merchant told CNBC that TransUnion still sees the automotive loan market as healthy – citing that the average interest rate for a new-vehicle loan climbed to 5.2 percent in the third quarter, while the average rate for a used vehicle loan hit 9.7 percent. But what’s healthy (and profitable) from a business perspective isn’t always sustainable or smart. The situation is stretching out loan terms so far that people are paying far more for mainstream products than they would have had to otherwise. Loans lasting 84 months are no longer uncommon and allow those juicy interest rates more time to increase the long-term cost of vehicle ownership.

While perhaps less than ideal, Merchant believes there will still be money to be made so long as people remain employed. Sure, some customers will be in debt up to their eyeballs and forced into increasingly unfavorable loan terms. But, as long as they can squeak by and not starve to death, all these financial institutions will be just fine – something you’re probably relieved to hear if you’re trying to decide how many expired cans of food you’ll need to eat to make next month’s car payment.

Though maybe it’s best not to paraphrase TransUnion’s VP in a way that actually explains the ramifications of the overarching situation and just let the man speak for himself.

“If we get into a position where employment starts to be a challenge in the United States and unemployment increases, that is when the industry will really start to be concerned about a consumer’s ability to pay their auto loans,” Merchant explained.

[Image: pathdoc/Shutterstock]

Become a TTAC insider. Get the latest news, features, TTAC takes, and everything else that gets to the truth about cars first by  subscribing to our newsletter.