A recent TransUnion study highlights a potentially concerning trend in the auto loan market: delinquency rates are rising. Nearly 3.5% of customers with a car loan are now in arrears.
A rising delinquency rate may indicate that households are struggling with debt, especially since car loan repayment is a high priority for many households. However, if you’re struggling to pay off all of your debt, you should consider paying off your most expensive debt first — and for most people, that means credit cards.
- Nearly 3.5% of customers with a car loan are now in arrears.
- People who may have missed car loan repayments during the pandemic have been able to meet them thanks to government support and the stimulus package. Now they are falling behind.
- The total number of auto loans in the United States declined due to rising interest rates.
- While it’s important to prioritize high-cost debt, typically credit card debt, auto loans are secured by the vehicle and may involve repossession if payments aren’t made.
Nearly 3.5% of car loans are in arrears
TransUnion’s recent 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, there was likely a backlog of delinquencies created by the pandemic. Many people who may have fallen behind on car loan repayments during the pandemic have not done so due to government assistance, stimulus programs, or car loan providers offering temporary relief to their customers. .
Second, although the number of delinquent auto loans has reached its highest level in five years, the total number of auto loans has declined since 2018. This is partly due to the limited supply during and immediately after the pandemic, which which means that many customers have had difficulty even finding a car to finance. It’s also linked 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 more expensive due to rising interest rates. Over the past month, the weighted average auto loan rate for all loan types rose 2.8 percentage points to 10.6%. People with low credit ratings are likely to be hardest hit by these price increases. In October, a deep subprime borrower, with a credit score below 580, saw an average rate of 18.2% on a new vehicle loan and 21.8% on a used vehicle loan.
In short: it seems many people who may have fallen behind 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 auto credits decreases. These two factors together mean that the crime 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 payment to be one of their most important financial commitments – second only to their mortgage payments and far more important than credit card payments.
And, that makes sense. Auto loan repayments are tied to a tangible asset – a vehicle – that you already use. Moreover, the increase in the cost of cars over the past year means that many people are actually in a positive loan-to-value position: that is, their car is actually worth more than the loan. they contracted to buy it. These two factors explain why paying off a car loan is considered a priority in many households.
Consumers should be wary of prioritizing unsecured debt over their car loan. If you’re having trouble staying current with your car loan, your lender may be able to offer flexibility on 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 is in default.
As with all types of debt, being late in your payments can negatively affect credit scores. It is therefore important to establish an appropriate budget in order to meet borrowing obligations.
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