Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. We also allow users to conduct research and compare data for no cost and help you make informed financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this site are from companies that pay us. This compensation can affect the way and where products appear on this website, for example, for example, the order in which they appear within the listing categories and other categories, unless prohibited by law for our mortgage or home equity products, as well as other home lending products. But this compensation does not influence the information we provide, or the reviews that appear on this website. We do not contain the universe of companies or financial offerings that might be accessible 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 navigating the ins and outs of securely borrowing money to purchase a car. 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 committed to helping readers gain confidence to take control of their finances with clear, well-researched information that simplifies complex topics into manageable bites. The Bankrate promise
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We receive compensation for placement of sponsored products andservices or by you clicking on certain hyperlinks on our site. This compensation could affect the way, location and when products are listed, except where prohibited by law for our loan products, such as mortgages and home equity and other home loan products. Other factors, such as our own website rules and whether the product is offered in your region or within your personal credit score may also influence how and when products are featured on this website. While we strive to provide a wide range offers, Bankrate does not include the details of each credit or financial product or service. While the prices of cars have been on the rise, auto loan delinquency rates have remained quite low during the initial two years after the outbreak. Unfortunately, this is no anymore. As the works to address the rising cost of living, more consumers are being unable to pay their auto loans and we can expect the delinquency rate to be back to pre-pandemic rates as we near the end of 2022. 2022 delinquency rates continue to increase. The robust credit trends that were evident during the pandemic are now returning to normal levels as illustrated by the auto loan performance this month. According to Cox Automotive's weekly insights from early October, loans that are more than 60 days delinquent have been increasing in value -- increasing 30.8 percent from the previous year. However, normal doesn't necessarily mean that it's a good thing. These numbers reveal that delinquency rates are rising higher each coming month -particularly for drivers with subprime credit. Subprime borrowers are those most directly affected by inflation and are more vulnerable to lenders. Currently, it is vital to keep up-to-date with your loan payments to avoid the risk of defaulting in the loan as well as losing your vehicle. The good thing is that these increased delinquencies haven't yet led to an increase in the number of motorists in default on their loans in the pre-pandemic level. However, the availability of vehicles and access to credit will likely shift the landscape when 2022 draws to the end of the year. Focus on the big image While it's true that the rate of delinquency is on the rise, it is important to look at the reasons that are driving this increase. Due primarily to an issue of supply and demand which is the primary driver of price increase in the automobile sector. With fewer inventory and more demand, more expensive vehicles mean higher rates, 6.07 and 10.26 percent, for new and used vehicles, respectively, according to . But Satyan Merchant is senior vice president and business director at TransUnion advises us to take a look at the bigger picture in relation to auto-related delinquencies in the wake of the "Critical Eye on Auto Performance, released in mid-October. Merchant points out that "while the rates of point-in-time delinquency are higher when contrasted with prior times, we have seen relatively stable performance in the past." Therefore, this increase in delinquency is normal when seen on an economic scale. The report also revealed that overall performance was comparable to rates in 2019, which is which is a positive indication. The shrinking "denominator" Another influential factor in rising delinquency rates is something TransUnion calls "the shrinking denominator," This relates to the number of cars that are being financed -significantly lower than before. This is driven by fewer originations in the year 2020, which continued to decrease due to a an insufficient supply of vehicles and an increase in the repossession of vehicles in 2021 and 2022. The two factors are combining to cause an "imbalance between origination volumes and total account runoff , which results in lower outstanding balance amount," found TransUnion. What kept automobile loan delinquency rates stable? The data from February 2022 suggests that the assistance of the government played an important role in keeping delinquency rates constant over the last two years. Because a lot of Americans receiving assistance from the government during this time are also in the subprime classification, it meant lower loan originations as well as delinquency rates. Missing loan originations across the board, most auto delinquencies are incurred by those with poor credit scores. Thus, with less lower-credit borrowers receiving new loans the delinquency rate remained quite low. Many low-credit borrowers did not have to finance new loans because of the lower demand for a vehicle with stays-at-home purchases and the more strict acceptance criteria that lenders are implementing. The data from the most recent Fed meeting support this view. Much of the end of 2020 and beginning of 2021 consisted of a lower number of loan originations. These "missing initializations" -- as the Fed stated them led to lower delinquency rates. If the drivers who are most likely to be a target for repossession or in default on their loans do not have loans less, there will be fewer defaults. This combined with federal assistance and lenders offering leniency on payment terms, resulted in fewer late loans and originations. A smaller number of subprime borrowers fall between 501 and 600, as per Experian. In the third quarter of 2022, the total loans and leases taken out by subprime borrowers of all kinds- including deep subprime -- falls to just under 16 percent. Separated out, deep subprime hit an all-time low at 1.85 percent. How to avoid falling behind on your auto loan This is a hot topic in the moment and could be a great option to save money. If you choose to get a loan that has a shorter time, then it is usually recommended to take out a larger loan to prevent unmanageable monthly installments. If it is difficult to meet your monthly payment, you might consider refinancing your loan. Keep in mind that extending your term also increases the amount of interest you have to pay over the course of your loan. When you buy a used car, drivers can own quality vehicles at less cost. And, since new cars are prone to depreciation within the first few years or so, you're more likely to avoid being on the loan and paying more than the value. In the end, default rates have been low through the first two years after the illness. The principal reasons for the lower default rates are lower borrowers, and more assistance from the government to borrowers who typically struggle to pay. With aid ending and increasing the number of people in search of automobiles -- and by the 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 aid and is not necessarily cause for concern. Learn more
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ways and pitfalls of taking out loans to buy cars. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are enthusiastic about helping readers gain the confidence to take charge of their finances by providing well-written, clear information that breaks down complex topics into manageable bites.
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