2023 Sets Record High Auto Loan Delinquency
Housing takes the cake when it comes to the biggest expense one can take on, but second to that is owning a vehicle. High interest rates, coupled with rising inflation, have left a dent in multiple sectors. In particular, they have left a big hit on the car market.
Just a couple of years ago, new vehicles were scarce due to multiple shortages caused by the pandemic. Loan rates were much lower, but people were also overpaying. Used vehicles shot up in value and held a premium price, while dealerships with new cars were charging huge markups, making it impossible for anyone to buy at MSRP (manufacturer’s suggested retail price) or lower. At the time, depending on one’s desire to buy, it wasn’t completely unheard of for someone to pay $5,000 to $20,000 above MSRP for a new car.
Longer car loans also became the norm over the past few years. Seventy-two months gravitated to the default when calculating numbers online to purchase a car. Shockingly, even 84-month loans are now available and may be marketed as a way to afford a car, since the longer-term loan results in lower monthly payments. Extremely lengthy auto loans may stretch past the factory warranty on a vehicle, making it a depreciating asset.
Auto loan delinquency in 2023 is greater than it was in 2009, at the end of the Great Recession. By the time the final numbers are in, it may surpass the recorded peak of delinquencies in the 1990s.
In September it was reported that 6.11% of subprime auto loans were 60 days past due. The interest rate on some of the subprime loans ranges from 11% to 21.18%. Even with great credit financing, a new vehicle could accrue around 5% interest, depending on the duration of the loan.
If payments are significantly past due, the vehicle is repossessed since lenders need to recoup their expenses. Typically, the vehicle ends up in auction. If it sells for less than what is owed, the debtor has to pay the difference, plus fees and possibly penalties and interest as well. It is very rare that the vehicle sells for more than what is owed.
In general, car prices have increased every year. Higher interest rates on loans further hamper affordability for most consumers. Additionally, the cost of insurance rates have gone up (which was also affected by the parts shortage) and the price of fuel is higher, too. The counter argument to fuel costs is the EV, but EVs are still nowhere near as affordable as entry-level gasoline-powered vehicles.
Inflation has taken a huge toll on everything, particularly for a large purchase, such as a car. It is uncertain what 2024 may bring. We may see an even greater number of loan delinquencies in the coming year.