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 offering you interactive tools and financial calculators that provide objective and original content. We also allow you to conduct research and compare data for no cost to help you make informed financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that are featured on this website come from companies who pay us. This compensation could affect how and when products are featured on the site, such as such things as the sequence in which they appear within the listing categories in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other home loan products. This compensation, however, does affect the information we publish, or the reviews you read on this site. We do not include the universe of companies or financial offers that may be accessible to you. SHARE: Massimo colombo/Getty Images
3 minutes read Read Published March 02, 2023.
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase cars. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing clear, well-researched information that simplifies complex topics into manageable bites. The Bankrate guarantee
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We are compensated in exchange for the placement of sponsored products or services, or when you click on specific links on our website. So, this compensation can affect the way, location and in what order products are displayed within the categories of listing in the event that they are not permitted by law. We also offer mortgage, home equity, and other products for home loans. Other elements, like our own proprietary website rules and whether a product is available in the area you reside in or is within your self-selected credit score range may also influence the way and place products are listed on this website. Although we try to offer the most diverse selection of products, Bankrate does not include the details of every financial or credit product or service. Although the cost of vehicles has been on the rise, auto loan delinquency rates have remained extremely low in the initial two years after the outbreak. This isn’t longer the case. As the works to address growing inflation, more people are becoming indebted on their auto loans and we can expect delinquency rates to return to pre-pandemic levels at the close of 2022. The delinquency rate for 2022 is expected to rise . The positive credit trends during the pandemic are returning to normal levels as illustrated by auto loan performances this month. According to Cox Automotive’s weekly insights from early October, loans more than 60 days past due have increased — up 30.8 percent from the year ago. However, normal doesn’t necessarily mean that it’s a good thing. The numbers above show that the rates of delinquency are accelerating higher each coming month -particularly for drivers with subprime credit. The subprime borrowers are the ones most directly affected by inflation and likely will be more susceptible to lenders. Currently, it is vital to stay up to date with your loan payment in order to ensure that you do not default upon the loan and losing your vehicle. The positive side is that these increased delinquencies haven’t yet resulted in an increase in the number of motorists who default on their loans in the pre-pandemic level. But the availability of cars and access to credit could alter the situation as 2022 comes to the end of the year. Focus on the big picture While it is true that the rate of delinquency is increasing but it is crucial to look at the reasons that have led to this increase. Due primarily to an issue of demand and supply, which remains the main influence of the rising cost of living in the auto industry. With fewer inventory and more expectations, the more costly vehicles result in higher prices, 6.07 and 10.26 percent for used and new cars respectively, according to . However, Satyan Merchant who is the senior vice president and business director at TransUnion, warns to take a look at the bigger picture in the context of auto delinquencies following the “Critical Eye on Auto Performance report, which was released in the middle of October. Merchant points out that “while the rates of point-in-time delinquency are elevated when comparison to previous time frames, we have also observed relatively stable performance in the past.” Therefore, this rise in delinquency is not unusual when seen on an economic scale. The report also found that overall performance was comparable to rates in 2019, which is an encouraging indication. A shrinking “denominator” Another factor that is causing the rise in delinquency rates is something TransUnion calls “the shrinking denominator,” It is a reference to the number of cars which are being funded -significantly lower than before. This is due to fewer originations in 2020 which continued decrease due to a limited vehicle supply and then an increase in vehicle repossession between 2021 as well as 2022. The two factors are combining to result in an “imbalance between the volume of originations and total account runoff , which results in lower outstanding balance volume,” found TransUnion. What was the reason that kept auto loan delinquency rates steady? The data from February 2022 suggests that assistance from the government played an essential role in keeping delinquency rates constant over the last two years. Because a lot of Americans who received extra help in this period also fall under the subprime category, it meant less loan originations and delinquency rates. Insufficient loan originations Across the board, the majority of auto delinquencies come from those with poor credit scores. Thus, with less people with low credit scores getting new loans the delinquency rate remained quite low. Many low-credit borrowers did not finance new loans because of the lower demand for vehicles that had stay-at-home-orders and more strict acceptance requirements that lenders have implemented. The results of the recent Fed meeting support this view. A large portion of the time between 2020 and beginning of 2021 were made up of a lower number of loan originations. These “missing originations” – as the Fed defined them — resulted in lower delinquency rates. If drivers that tend 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 repayments, led to fewer delinquent loans and originations. A smaller number of subprime borrowers fall between 501 and 600, as per Experian. The third quarter in 2022, the total loans and leases made by subprime borrowers of all kindsincluding deep subprime- falls to just under 16 percent. Separated out deep subprime sank to the record low rate of 1.85 percent. What can you do to ensure that you don’t fall behind with your vehicle loan It’s hot in the moment and could be a good alternative to save money. But if you decide to get an loan with a shorter duration generally, it’s recommended to take out a larger loan to prevent unmanageable monthly installments. Also, if it becomes difficult to pay your monthly payment, consider refinancing your loan. Remember that extending your term also increases the amount of interest you have to pay throughout the term of your loan. If you purchase a used car it is possible to own an excellent vehicle for less cost. And, since new cars depreciate quickly in the first few years or so, you’re more likely to avoid becoming on the loan and owing more than it’s worth. In the end, delinquencies have been low through the initial 2 years following the outbreak. The primary reasons for the lower rates of default are the fewer borrowers and more government assistance for borrowers who would normally be struggling to make payments. With aid ending and increasing the number of people in search of vehicles — and , by extension, financing — there will likely be a steady increase in the number of delinquencies that will occur by 2022. However, this is more of an indication of the ending of federal assistance, and not necessarily an alarm signal. Learn more
The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ways and pitfalls of taking out loans to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping their readers achieve confidence in taking control of their finances by giving clear, well-studied information that breaks down otherwise complicated topics into digestible pieces.
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