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Owning a car is a necessity for most Americans. If you don’t have one, there’s basically nowhere to go, which is an especially big problem if you have a job that doesn’t allow for remote work. Now we see an increasing number of Consumers defaulting on car loans they can no longer afford what seems bad.
ABC reports that while car garnishments fell dramatically in the early stages of the pandemic, the number of borrowers delinquent on their car payments has recently returned to pre-pandemic levels. And for those living in the lowest income bracket, the default rate is higher than it was in 2019. Industry analysts reportedly fear this trend will continue into 2023.
In fact, things could get worse, as the average monthly payment for new cars has increased by 26 percent since 2019. It’s currently $718 a month, and one in six new car buyers is paying $1,000 a month or more. Unemployment is still low and petrol prices continue to fall, but many other goods and services are much more expensive today than they were a few years ago.
“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,” Ivan Drury, director of insights at Edmunds, told NBC. “This is where we start to see the withdrawals, because it’s just everything else that’s nailing you.”
The Consumer Financial Protection Bureau is reportedly particularly concerned about loans from 2021 and 2022, when new car prices were particularly high, and so-called subprime borrowers with poor credit ratings.
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“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.”
But while analysts are concerned, they don’t think we’ll see numbers anywhere near where they were in 2008 and 2009. Last quarter, auto loan defaults were 2.2 percent, down from the 2.35 percent we saw in the third quarter of 2019. Ally Financial reportedly thinks the number could reach 3.8 percent. Meanwhile, back in 2009, arrears were more than 4 percent.
Unfortunately for consumers, it doesn’t look like conditions are going to change in their favor anytime soon. Interest rates are likely to remain high and a limited supply of new vehicles is likely to keep both new and used car prices high while companies continue to hike prices faster than inflation. So unless you absolutely have to buy a new car, it’s probably wise to wait and see.
“I [don’t] dare you to imagine what happens to people who take out new loans today,” said Drury. “It doesn’t get any better when we see those payments this high.”
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