Increasing Number of Americans Struggling with Car Payments
An escalating percentage of Americans are falling behind on their automobile payments, as they face the pressure of rising interest rates on auto loans, persistent inflation, and the cessation of federal pandemic aid.
Recent data from Fitch Ratings reveals that as of September, 6.1% of subprime borrowers were delinquent on their auto loans for at least 60 days, marking the highest share recorded since the credit rating agency began tracking this figure in 1994.
Margaret Rowe, senior director at Fitch Ratings, explained that delinquencies have been gradually increasing since the end of government stimulus from the pandemic, attributing this trend to persistent inflation, decreased real income, and the depletion of pandemic-related savings, all of which make it more challenging for subprime borrowers to manage their debt.
Exhausted Savings and Steady Car Prices
According to the Federal Reserve Bank of San Francisco, most Americans who saved money during the pandemic have utilized those funds. Simultaneously, the cost of new vehicles remains unchanged, with an average price of around $48,000 over the past year, according to Kelley Blue Book data. Consequently, an increasing number of car owners find themselves making payments of over $1,000 per month.
Auto loan interest rates have continued to rise this year, closely tracking the Federal Reserve’s increase in its benchmark rate to address inflation. Cox Automotive reports that the interest rates for new vehicle loans reached 10.48% in September, up from 9.51% in January. Additionally, the average financing rate for used vehicles was 11.4% last month, as stated by Edmunds.
The Burden of Auto Loan Debt
As of the second quarter of this year, Americans collectively held $20 billion in auto loan debt, based on the latest data from the Federal Reserve Bank of New York.
Implications for Banks and the Economy
The issue of delinquent car payments extends beyond drivers. Banks with a significant share of auto loans in their portfolios may experience mounting losses if individuals are unable to repay their vehicle debt. Analysts from S&P Global Ratings anticipate a further decline in auto loan and lease performance due to factors such as high interest rates, loan balances, declining used car prices, diminishing savings rates among consumers, and a potential economic slowdown.
