Auto loan delinquencies are soaring, with consumers hit by high car prices

American consumers are struggling under the weight of soaring auto loan debt.

Auto delinquencies are up more than 50% since 2010 and have transitioned from the safest to riskiest consumer commercial credit product in that time frame, according to a Friday report from VantageScore.

Here’s why: record-breaking car prices, higher maintenance and insurance costs, and elevated interest rates. Longer term loans are also to blame.

“The bigger picture: the auto market is a bellwether for household financial health,” the report says. “A sustained climb in auto delinquencies signals deeper affordability challenges across the consumer economy.”

The country is seeing “the most precarious consumer credit health situation since the last financial crisis,” said VantageScore Chief Economist Rikard Bandebo.

“More and more people are struggling to make ends meet,” Bandebo added.

Delinquencies among other loan categories, like credit cards and first mortgages, have declined since the first quarter of 2010, making autos a bit of an outlier, VantageScore said.

High car prices are a big culprit. The average transaction price of a new vehicle floated above $50,000 in September for the first time, likely pushed higher by luxury models and pricey electric vehicles, according to estimates from Kelley Blue Book.

Meanwhile, data released this week from Edmunds, a car shopping website, showed drivers are increasingly underwater when trading in older models for new cars, meaning their original vehicles are worth less than the amount still owed. Drivers carried more than $10,000 worth of debt in almost a quarter of upside-down trade-ins during the third quarter, for example.

Overall, Americans are carrying more than $1.66 trillion in auto debt, with borrowers tumbling into “delinquencies and defaults at a pace that exceeds pre-pandemic levels and rivals the years immediately preceding the 2008 economic crisis,” a report from the Consumer Federation of America said last month.

“We have people that are financing their car loan over eight years, which is something that we hadn’t seen since the Great Recession,” Erin Witte, the director of consumer protection for the Consumer Federation of America, told Yahoo Finance. “Of course, when you’re extending that financing out, you’re paying more and more. And if you trade that car in before the loan term is over, you’re probably going to owe money on it, which is another cascading problem: You’re paying interest twice — it makes the next car more expensive.”

Car repossessions are also up, and the stock market is on edge after the bankruptcies of the subprime auto lender Tricolor and auto parts maker First Brands, with JPMorgan Chase CEO Jamie Dimon saying that “when you see one cockroach, there’s probably more.”

Michael Brisson, auto economist at Moody’s Analytics, said the rise in delinquencies can also be traced back to auto lenders loosening their credit standards at a time when credit scores were already broadly increasing — thanks to pandemic-era stimulus and relief programs — while car prices were ticking higher. Some consumers looked healthier than they were.

Indeed, economists for the Federal Reserve Board wrote last September that delinquencies were concentrated among more recent loans with borrowers stressed by higher monthly payment amounts.

“The increase in loan amount likely reflects the interactions of both credit supply and demand factors: borrowers demanded larger loans amid the run-up in car prices from mid-2020 to mid-2023 and lenders, in aggregate, appeared to relax their credit standards to originate these loans,” the economists said. Credit standards have tightened more recently, Brisson said. But consumers are still going delinquent, since costs have risen across the board, student loan payments have resumed, and budgets are strained amid a weak job market.

Learn more: How the Fed rate cut affects your loans, bank accounts, credit cards, and investments

“Auto delinquencies are as high as they’ve been since 2011,” Brisson said. “However, the rate of growth has slowed. They’ve kind of leveled off over the more recent past.”

Still, it’s clear some consumers are feeling strained. Growth in delinquencies among prime borrowers, or those with credit scores between 661 and 780, has been especially stark, though subprime consumers generally have the highest delinquency rates. VantageScore noted that prime- and near-prime consumers have been “driving the overall increase after lenders tightened their lending.”

Brisson said he’s also seen that delinquencies are shooting up among borrowers without credit scores in “the largest increase we’ve seen on records.”

If the unemployment rate remains below 5% and inflation is under control, delinquencies overall will likely ultimately come down, Brisson said.

Emma Ockerman is a reporter covering the economy and labor for Yahoo Finance. You can reach her at [email protected].

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