Auto loan delinquency rates expected to return to normal Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive financial calculators and tools that provide objective and original content. We also allow you to conduct research and compare data for no cost - so that you can make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site are from companies that compensate us. This compensation may impact how and where products appear on this website, for example such things as the order in which they be listed within the categories of listing in the event that they are not permitted by law. Our mortgage or home equity products, as well as other home lending products. However, this compensation will have no impact on the information we publish, or the reviews appear on this website. We do not include the vast array of companies or financial offers that may be available to you. SHARE: Massimo colombo/Getty Images
3 min read Published March 02, 2023.
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in understanding the ins and outs of securely taking out loans to buy a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to take control of their finances through providing precise, well-studied and well-researched data that breaks down complex topics into manageable bites. The Bankrate promise
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This compensation could affect the way, location and when products appear within listing categories and categories, unless it is prohibited by law. This is the case for our credit, mortgage and other home lending products. Other factors, like our own rules for our website and whether a product is offered in the area you reside in or is within your own personal credit score could also affect how and where products appear on this site. While we strive to provide an array of offers, Bankrate does not include details about every financial or credit product or service. Although the cost of vehicles has been on the rise, auto loan delinquency rates have been surprisingly low for the first two years of the pandemic. Unfortunately, this is no anymore. As we work to tackle increasing inflation, more and more borrowers are falling behind on their auto loans and we can expect the delinquency rate to rise back to pre-pandemic levels at the close of 2022. The delinquency rate for 2022 is expected to rise . The positive credit trends that were evident during the pandemic are now returning to normal levels, exemplified by the improvement in auto loan performance this month. According Cox Automotive's weekly report in the beginning of October, loans over 60 days delinquent are increasing in value -- increasing 30.8 percent from a previous year. But normal does not necessarily mean good. The numbers above show that rates of delinquency are inching upwards each month- especially for subprime drivers. These borrowers are directly affected by inflation and likely will be more susceptible to lenders. It is crucial to stay up to date with your loan payment in order to ensure that you do not default on your loan as well as losing your vehicle. The positive side is that these increased delinquencies have not yet led to an increase in the number of people defaulting on their loans at pre-pandemic levels. However, the availability of vehicles and access to credit are likely to alter the landscape when 2022 draws to the end of the year. Concentrate on the big image While it's certain that delinquency rates are increasing, it is important to consider the factors that are driving this increase. It is due to a problem of supply and demand which is the primary driver of the price rise in the automobile sector. With lower inventory and higher demands, higher priced cars mean higher rates, 6.07 and 10.26 percent in the case of used and new vehicles, respectively, according to . But Satyan Merchant, Senior vice-president and automotive business leader at TransUnion urges consumers to consider the larger picture in relation to auto delinquencies after the "Critical Eye on Auto Performance release in mid-October. Merchant notes that "while points-in-time rates of delinquency are elevated when compared to prior times, we have seen relatively stable performance in the past." Therefore, this growth in delinquency can be considered normal when considered on an economic scale. The report also showed that overall performance was comparable to the rates of 2019, an encouraging indication. A shrinking "denominator" Another factor in rising delinquency rates is something TransUnion refers to as "the shrinking denominator," It is a reference to the amount of vehicles that are being financed -significantly lower than before. This is due to fewer originations in the year 2020, which continued to decrease due to a shortages of vehicles, and an increase in the repossession of vehicles in 2021 as well as 2022. These factors have combined to create an "imbalance between origination volumes and total account runoff results in lower outstanding balance volume," found TransUnion. What kept auto loan delinquency rates constant? The data from February 2022 suggests that the assistance of the government played an essential factor in keeping rates of delinquency constant over the last two years. Since a large portion of Americans receiving extra assistance during this period also fall into the subprime category, it meant less loan originations and lower delinquency rates. Missing loan originations Across the board, the majority of auto delinquencies come from people with low credit scores. So, with fewer low-credit borrowers getting new loans the delinquency rate remained quite low. Many low-credit borrowers didn't finance new loans due to less demand for a vehicle with stay-at-home-orders and more strict acceptance requirements that lenders have implemented. The results of the recent Fed meeting confirm this belief. A large portion of the time between 2020 and beginning of 2021 was comprised of a decrease in loan originations. The "missing beginnings" -- as the Fed stated them resulted in lower delinquency rates. If those who tend to be subject to repossession or defaulting on their loans do not have loans, fewer delinquencies will occur. This, along with federal assistance and lenders offering leniency on payments, meant fewer delinquent loans and loan originations. Less subprime borrower ranges from 501 to 600 as per Experian. For the quarter ending March 2022, the total loans and leases made by all subprime borrowersincluding deep subprime- falls to just under 16 percent. If they are separated out, deep subprime hit a record low rate at 1.85 percent. How can you avoid being in debt with your vehicle loan This is a hot topic right now so can be a good option to save money. But if you decide to get an loan with a shorter term generally, it's recommended to take out a larger loan in order to avoid paying monthly fees that are too large. Also, if it becomes challenging to make your monthly payment, consider changing the terms of your loan. Remember that extending your loan term will also increase your interest rate that you pay throughout the term of your loan. When you buy a used car you can get quality vehicles at an affordable cost. Also, because new cars appreciate quickly within the first few years or so, you're more likely to stay away from being on the loan due to owing more than it's worth. In the end, delinquencies have been low through the initial two years of the pandemic. The principal reasons for the lower default rates are fewer borrowers, and more government assistance for borrowers who would normally struggle to pay. With assistance ending and more people looking for vehicles -- and by the extension, financing there is likely to see a steady rise in defaults over the period 2022-2022. However, this is more of a representation of the end of federal aid and is not necessarily cause for concern. 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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the ways and pitfalls of taking out loans to buy cars. Edited 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 their readers get the confidence to take control of their finances by providing well-written, clear facts that break down otherwise complicated topics into digestible pieces.
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