WASHINGTON — A growing number of consumers are falling behind on their car payments, a trend financial analysts fear will continue, a sign of the strain that rising car prices and persistent inflation are putting on household budgets.
Withdrawals plummeted early in the pandemic as Americans got a boost from stimulus checks and lenders were more willing to accommodate arrears. But in recent months, the number of people delinquent on their car payments has approached pre-pandemic levels, and for the lowest-income consumers, loan default rates are now exceeding 2019 levels, according to Fitch data .
Industry analysts fear the trend will only continue into 2023 as economists expect unemployment to rise, inflation to remain relatively high and household savings to fall. At the same time, more and more consumers are having to strain their budgets in order to be able to afford a vehicle; The average monthly payment for a new car has increased 26% since 2019 to $718 a month, and nearly one in six new car buyers spends more than $1,000 a month on vehicles. Other costs associated with owning a car have also skyrocketed, including insurance, gas and repairs.
“These redemptions are for people who could afford that $500 or $600 a month two years ago, but now everything else in their life is more expensive,” said Ivan Drury, director of insights at car buying website Edmunds. “This is where we start to see the withdrawals, because it’s just everything else that’s nailing you.”
‘Recipe for Disaster’
It has been difficult for those involved in the redemption business to keep up. Jeremy Cross, the president of International Recovery Systems in Pennsylvania, said he couldn’t find enough repo men to meet demand or space to accommodate all of the cars his firm was tasked with repossessing. As the holidays approached he’s been particularly busy as people prefer to spend elsewhere and he expects business to continue next year and 2024.
“It’s really the perfect storm right now,” Cross said. “For the past two years, vehicle prices have been inflated because there was no new car supply, people were still buying like crazy because they had lots of money to stay at home, they had inflated credit, so it was like a recipe for disaster .”
At the same time, the number of foreclosure businesses has shrunk by 30% as many firms shut down and workers found jobs in other industries when foreclosures plummeted in 2020, Cross said. Now, he said, lenders are paying him premiums to repossess their cars first in anticipation of another spike in loan defaults.
“Volume is increasing and the remaining companies that are still doing redemptions are very busy,” Cross said. “The totals are still not pre-pandemic numbers, but we’re going to see a big shift in 23 and 24, which I think lenders are beginning to recognize because they’re offering financial incentives that they’ve never had in the past.” had to do. They fight for their position, knowing that there is only so much bandwidth available.”
It’s an issue of concern for officials at the Consumer Financial Protection Bureau, who say they’re seeing troubling signs in the auto market, particularly among so-called subprime borrowers with sub-par credit ratings and those with loans taken out in 2021 and 2022, as the Car prices were particularly high.
“Loans taken out in these years are doing worse than in previous years simply because these consumers had to finance cars when supply chains were blocked and prices started to rise,” he said Ryan Kelly, acting manager of the auto finance program for the CFPB. “These consumers have been hit twice by inflation. First when they needed to finance a car after prices went up, and then when they needed gas after the start of the Russia-Ukraine conflict. So there’s just a lot of consumer stress.”
If the economy worsens, as many economists are predicting in 2023, the number of those who default on their car payments is likely to continue to rise, even as consumers tend to prioritize their car payment over most bills because a car that’s how important it is to get to work or possibly shelter, industry analysts said.
However, the rate of defaults and seizures is unlikely to reach the levels of 2008 and 2009, when there was a spike due to the financial crisis. The percentage of auto loans that were 30 days past due was 2.2% in the third quarter, according to data from Experian, compared to 2.35% for the same period in 2019. In contrast, just over 4% of auto loans defaulted in 2009 delayed.
“We expect it to continue to rise and perhaps even break through pre-pandemic levels due to macro headwinds from higher interest rates, higher borrowing costs and expectations that unemployment will continue to rise,” said Margaret Rowe, the lead auto analyst at fitch . “I think our expectation is that we will keep going up, but it was just so low that even going up isn’t like what we saw in the Great Financial Crisis.”
‘A lot of stress’
Analysts at Cox Automotive project that while loan defaults and garnishments will increase from their pandemic lows, over the long term through 2025, they project total defaults and garnishments to remain at or below historical norms.
Still, the financial crunch has been particularly tough for low-income consumers looking for budget vehicles that are particularly hard to find. While in the past these car buyers would have bought a used car for $7,000-$15,000, they now have to spend $20,000-$25,000 for the same type of vehicle. Among dealers who supply subprime and deep-subprime consumers, the average list price for their cars has nearly doubled since the pandemic began, according to the CFPB.
“This group of consumers, which is prime and subprime, is being hit very, very hard by inflation. This group of people didn’t have much disposable income. They had to finance a more expensive car and were then hit by an overall increase in prices. There’s just a lot of stress,” Kelly said.
Ally Financial, which holds a significant portion of loans to subprime borrowers, said in its October earnings report that it expects arrears to rise to as much as 3.8%, compared with 3.1% in 2019.
Another risk to car buyers’ finances is the growing term of auto loans, many of which now exceed seven years. While these longer-term loans can lower monthly payments at higher prices, consumers risk repaying the loan much more slowly as the car depreciates and are left under water if they have to sell the vehicle. It can also mean higher interest costs over the life of the loan on top of already inflated vehicle prices.
There is unlikely to be any relief for consumers next year. Interest rates are expected to remain high for those who need credit to buy a vehicle, and Covid-related plant closures and material shortages continue to ripple through the auto manufacturing supply chain, limiting the number of new vehicles.
“I dare to consider what happens to people who sign up for new loans today,” Drury said. “It doesn’t get any better when we see those payments this high.”
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