A recent study by TransUnion points to a potentially worrying trend in the auto loan market – default rates are rising. Almost 3.5% of car loan customers are now in arrears on their payments.
A rising default rate may indicate that households are struggling with debt, especially given that car loan repayments are a high priority for many households. However, if you’re struggling to pay off all of your debts, you might want to consider paying off your most expensive debt first — and for most people, that means credit cards.
- Almost 3.5% of car loan customers are now in arrears on their payments.
- People who may have missed car loan repayments during the pandemic have been able to meet them because of government support and the stimulus package. Now they are falling behind.
- The total number of auto loans in the US has declined due to rising interest rates.
- While it’s important to prioritize high-value debt, typically credit card debt, auto loans are collateralized by the vehicle and may include a repossession if payments are not made.
Almost 3.5% of auto loans are past due
The latest TransUnion study found that in Q2 2022, 3.34% of auto loans were more than 30 days past due and 1.43% were more than 60 days past due on a payment. This is the highest rate in five years and a significant increase over the past two years.
TransUnion suggested a number of reasons for this increase. First, they point out that there was likely a backlog of arrears caused by the pandemic. Many people who may have defaulted on their car loan repayments during the pandemic have not because government relief, stimulus programs or car loan providers have offered temporary help to their customers.
Second, while the number of past-due auto loans is at a five-year high, the total number of auto loans has been declining since 2018. This is partly due to limited supply during and immediately after the pandemic, resulting in many customers struggling to even find a car to finance. It’s also related to the rising cost of new vehicles — the average cost of a new vehicle is over $48,000, a record high.
Car loans are also becoming more expensive due to rising interest rates. Over the past month, the weighted average auto loan rate across all loan types has increased by 2.8 percentage points to 10.6%. Those with low credit ratings are likely to be hit hardest by these price hikes. In October, a deep subprime borrower with a credit score below 580 saw an average interest rate of 18.2% on a new car loan and 21.8% on a used car loan.
In short, it appears that many people who may have defaulted on their car loans during the pandemic but were kept solvent by stimulus payments are now doing so. At the same time, the total number of car loans is decreasing. Both factors together mean that the delinquency rate is at an all-time high.
Should I Prioritize My Car Loan?
The TransUnion study also revealed some interesting data on how consumers prioritize their payments. The study found that most people consider their monthly car loan payments to be one of their most important financial obligations — right behind their mortgage payments and far more important than paying off their credit cards.
And that makes sense. Auto loan repayments involve a tangible asset—a vehicle—that you already use. Additionally, the rise in car prices over the past year has meant that many people are actually in a positive loan-to-value position: that is, their car is actually worth more than the loan they took out to purchase it. Both factors explain why paying off a car loan is a high priority in many households.
Consumers should be careful about prioritizing unsecured debt over their car loan. If you’re having trouble staying on top of your car loan, your lender may be able to offer flexibility with your payments, so you should contact them before you miss a payment. If you miss a payment, your lender will likely impose a penalty and eventually repossess the vehicle if the loan defaults.
As with all types of debt, delinquency can negatively impact one’s credit score, so it’s important to have an adequate budget to service credit obligations.