U.S. Auto Loan Delinquencies Hit 15-Year High Amid Inflation and Negative Equity
Auto loan delinquency rates in the United States have reached a 15-year high across various borrower demographics and lender types, according to recent data from TransUnion and MorningStar analysis. This trend includes increases in late payments ranging from 30 days to more than three months. Subprime borrowers, defined as those with credit scores below 600, are experiencing the highest delinquency rates, with nearly 6 percent of subprime auto loans at least 60 days overdue, marking the highest levels since Fitch Ratings began tracking these statistics in 1993.
Delinquency growth is not confined to low-credit borrowers; rising rates are also evident among higher credit score borrowers and various income levels, indicating a broad-based issue affecting the auto loan market. Captive lenders, typically auto manufacturers' financing arms, continue to experience elevated delinquency rates compared to pre-pandemic levels, despite primarily serving higher-credit borrowers. Non-captive lenders, often used by subprime borrowers, show the fastest growth in delinquency, surpassing pre-COVID-19 levels.
Rising delinquencies among borrowers of all ages are notable, with younger consumers in their 20s more than twice as likely to be delinquent compared to seniors. However, the upward trend spans all age groups, highlighting widespread financial pressures. The primary drivers behind these elevated delinquency rates include the overall affordability crisis for car owners exacerbated by inflationary pressures on vehicle prices, fuel costs, and maintenance expenses.
Data show that after peak vehicle prices in 2022 and 2023, ongoing inflation has outpaced wage growth for most consumers, resulting in tighter budgets even for employed borrowers. Elevated gas prices and maintenance costs contribute to ongoing financial strain. Analysts note that delinquency rates could stabilize or decline if inflation recedes and wage growth accelerates, but many borrowers remain vulnerable due to high negative equity positions in their vehicles.
Negative equity, where the loan balance on a vehicle surpasses its market value, limits options for borrowers facing financial difficulties, making it more challenging to refinance or reduce monthly obligations by trading for lower-cost vehicles. Lenders may also find it harder to modify loans with borrowers in such situations, potentially leading to increased repossession activity.
The rise in serious auto loan delinquencies has implications for lenders, investors, and policymakers, emphasizing the need to monitor borrower financial health and lending standards amid shifting economic conditions. It underscores the intersection of consumer credit risk, market pricing volatility, and macroeconomic factors affecting the broader credit landscape.
This trend occurs in a regulatory environment where transparency and consumer protection remain priorities, with stakeholders paying close attention to debt servicing challenges and potential interventions. The dynamics suggest that auto loan delinquency trends should be a key focus for insurance and credit risk professionals assessing market stability and forecasting potential losses.
In summary, the current auto loan market exhibits a pronounced increase in delinquency rates linked to inflationary pressures on ownership costs and stagnant relative income growth. This affects a broad spectrum of borrowers and lender types, creating elevated credit risk and operational challenges. Monitoring these developments is vital for informed risk management and regulatory compliance in the auto finance and insurance sectors.