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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 better financial decisions by providing you with interactive financial calculators and tools that provide objective and original content. This allows you to conduct research and compare data for no cost to help you make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies who pay us. This compensation can affect the way and where products appear on the site, such as, for example, the order in which they be listed within the categories of listing and other categories, unless prohibited by law. Our mortgage home equity, mortgage and other home lending products. However, this compensation will not influence the information we provide, or the reviews that you read on this site. We do not contain the entire universe of businesses or financial offerings that might be available to you. SHARE: Massimo colombo/Getty Images

3 min read Published March 02, 2023.

Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in understanding the details of borrowing money to buy cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain confidence to take control of their finances by providing clear, well-researched information that simplifies complex subjects into digestible pieces. The Bankrate promises

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There are money-related questions. Bankrate has answers. Our experts have helped you understand your finances for more than four years. We continually strive to provide consumers with the expert guidance and the tools necessary to be successful throughout their financial journey. Bankrate adheres to a strict code of conduct standard of conduct, so you can rest assured that our content is truthful and precise. Our award-winning editors and journalists produce honest and reliable information to assist you in making the right financial decisions. Our content produced by our editorial team is factual, objective, and not influenced from our advertising. We’re open about the ways we’re in a position to provide quality content, competitive rates and helpful tools to our customers by describing how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the promotion of sponsored goods and, services, or through you clicking certain hyperlinks on our site. Therefore, this compensation may influence the manner, place and in what order items appear within listing categories and categories, unless it is prohibited by law. This is the case for our credit, mortgage and other home loan products. Other factors, such as our own proprietary website rules and whether a product is available in the area you reside in or is within your own personal credit score can also impact how and when products are featured on this site. We strive to provide an array of offers, Bankrate does not include information about each credit or financial product or service. Although the cost of vehicles has been on the rise, automobile loan delinquency rates were quite low during the initial two years of the pandemic. This isn’t longer the case. As we work to tackle growing inflation, more consumers are being unable to pay their auto loans — and we can expect delinquency rates to rise back to pre-pandemic levels as we near the end of 2022. 2022 delinquency rates continue to rise . The positive credit trends during the pandemic have returned to normal levels, as evidenced by the improvement in auto loan results this month. According Cox Automotive’s weekly report in the beginning of October, loans over 60 days past due have increased — up 30.8 percent from the year prior. However, normal doesn’t necessarily mean it’s good. The numbers above show that rates of delinquency are inching higher each coming month — especially for subprime drivers. These borrowers are directly affected by inflation and likely can be vulnerable to lenders. In the present, it is essential to stay up to date on your loan payment in order to avoid the risk of defaulting upon the loan or losing your vehicle. The good news is that these increased delinquencies have not yet led to an increased number of drivers who default on their loans at levels that were pre-pandemic. But the availability of cars and credit access are likely to alter the landscape when 2022 draws to an end. Focus on the big picture While it is certain that delinquency rates are rising but it is crucial to consider the factors which are causing this rise. It is due to a problem of supply and demand which is still the major driver of price increase in the automobile industry. With less inventory and increased demands, higher priced vehicles result in higher prices, 6.07 and 10.26 percent for used and new automobiles, respectively, as per . However, Satyan Merchant, Senior vice-president and business manager at TransUnion, warns to consider the larger picture when it comes to auto delinquencies following the “Critical Eye on Auto Performance report, which was released in the middle of October. Merchant says that “while the rates of point-in-time delinquency are elevated when comparison to previous periods, we have observed quite stable performance from the past.” This increase in delinquency is normal when viewed on a larger economic scale. The report also found that general performance was similar to 2019 rates, an encouraging indicator. A shrinking “denominator” Another important factor that is causing the rise in delinquency rates is what TransUnion refers to as “the shrinking denominator,” This relates to the amount of vehicles that are being financed -far less than in the past. This is driven by fewer originations in 2020 which continued decline due to an insufficient supply of vehicles and the increase in repossessions of vehicles in both 2021 and 2022. The two factors are combining to create an “imbalance between origination volumes and runoff of total accounts, which results in lower total outstanding account amount,” found TransUnion. What is the factor that has kept automobile loan delinquency rates constant? Data from February 2022 shows that the assistance of the government played a key role in keeping delinquency rates steady over the past two years. Since a large portion of Americans receiving assistance from the government in this period also fall under the subprime classification this resulted in that there was a decrease in loan originations as well as delinquency rates. Missing loan originations Across all categories, the majority of auto delinquencies are incurred by borrowers with low credit scores. So, with fewer lower-credit borrowers receiving new loans, delinquency rates remained fairly low. A lot of low-credit borrowers were unable to finance new loans because of the lower demand for a vehicle with stay-at-home-orders and more strict acceptance requirements that lenders have implemented. The findings following the recent Fed meeting support this view. Much of the end of 2020 and start of 2021 were made up of a decrease in loan originations. The “missing initializations” – 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 less, there will be fewer defaults. This, in conjunction with federal aid and lenders offering leniency on payment terms, resulted in fewer late loans and loan originations. Fewer subprime borrowers Subprime are those who have a credit score between 501 and 600 according to Experian. The third quarter in 2022 the total loans and leases made by subprime borrowers of all kinds- including deep subprime -is just below 16 percent. Separated out, deep subprime hit the record low rate that was 1.85 percent. How can you avoid being in debt on your auto loan It’s hot in the moment and could be a viable option to save some money. However, if you opt to get an loan that has a shorter time typically, it’s recommended to take out a larger loan to prevent unmanageable monthly installments. Also, if it becomes difficult to meet your monthly payments, think about the possibility of refinancing your loan. Keep in mind that extending your term can also increase the amount of interest that you pay over the life of your loan. By purchasing a used vehicle, drivers can own a high-quality vehicle at less cost. And, since new cars appreciate quickly within the first two years and you’re more likely to stay away from being on the loan and paying more than the value. In the end, delinquencies are low in the first two years after the illness. The primary reasons for the lower rate of default are lower borrowers, and more government assistance for borrowers who would normally be struggling to make payments. With aid ending and increasing the number of people in search of vehicles — and , by extension, financing there is likely to be a steady increase in defaults over the period 2022-2022. But this is more an indication of the ending of federal assistance, and not necessarily cause for concern. Find out more

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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the ins and outs of securely borrowing money to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are enthusiastic about helping readers gain the confidence to take control of their finances through giving clear, well-studied details that cut complicated subjects into bite-sized pieces.

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