Delinquencies on Car Loans Rise as Auto Prices and Inflation Strain Household Budgets
A concerning trend is emerging as a growing number of Americans are struggling to keep up with their car payments, posing a potential threat to the US economy. The COVID-19 pandemic initially saw a decline in car loan delinquencies due to government stimulus measures. However, as prices for both new and used cars soared, consumers were forced to take out larger loans, depleting their savings and causing delinquencies to steadily rise.
The latest data from the New York Federal Reserve reveals that by the end of December, approximately 7.69% of auto debt had moved into delinquency, marking the highest level since 2010. Analysts are puzzled by this trend, but suggest that the exorbitant prices of cars may be a contributing factor.
High Prices and Steep Borrowing Costs Drive Delinquencies
The surge in delinquencies can be attributed to the combination of soaring car prices and steep borrowing costs. The COVID-19 pandemic disrupted the global supply chain, leading to a shortage of semiconductors and other components. This shortage, coupled with strong consumer demand, caused prices for both new and used vehicles to skyrocket.
Although prices have started to stabilize, the average cost of a new car still stands at around $48,759 – close to a record high. While this figure has decreased by 2.4% since the beginning of 2023, it remains 18% higher than three years ago, before the onset of the inflation crisis.
Furthermore, interest rates have spiked over the past two years, exacerbating the financial strain on car owners. The average new auto loan rate in December was 7.1%, up from 6.9% at the start of the year. Meanwhile, the average used auto loan rate stands at 11.4%. Even a slight change in rates can significantly impact monthly payments.
Financial Stress Mounts as Monthly Payments Surpass $1,000
For many Americans, rising interest rates and high car prices have pushed their monthly payments above $1,000. In fact, data from Edmunds indicates that the percentage of consumers paying at least $1,000 a month for a vehicle reached an all-time high of 17.1% in the second quarter of 2023, up from 16.8% at the beginning of the year.
As the Federal Reserve hints at maintaining elevated interest rates until inflation subsides, rates are expected to remain high. This poses a significant challenge for borrowers and raises concerns about the overall financial health of the American consumer and the broader economy.
“Auto loan transitions into delinquency are still rising above pre-pandemic levels,” warns Wilbert van der Klaauw, an economic research adviser at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”