Rising car payment delinquencies in the US amid higher rates

The economic strain from the pandemic continues to linger on Americans’ finances. A growing percentage is falling behind on their car payments, squeezed by rising auto loan interest rates, stubborn inflation, and the cessation of federal pandemic aid.

Recent data from Fitch Ratings revealed that 6.1% of subprime borrowers were delinquent, or at least 60 days past due, on their auto loan as of September — marking the highest share recorded by the credit rating agency since it first started tracking the figure in 1994.

Car payment delinquencies on the rise in the US following end of federal aid

“Delinquencies are climbing and have been increasing incrementally since government stimulus from the pandemic ended.”

She added that persistent inflation, the erosion of real income, and the exhausting of pandemic-related savings are making it harder for subprime borrowers to service their debt.

Depletion of savings and vehicle price stagnation

The Federal Reserve Bank of San Francisco noted that most Americans who saved money during the pandemic have exhausted those funds.

Meanwhile, the typical price of a new vehicle has remained steady, hovering around $48,000 over the past year, according to Kelley Blue Book data. These prices have led to a growing number of car owners making payments of more than $1,000 a month.

Interest rates on auto loans continue to climb this year, almost in lockstep with the Federal Reserve increasing its benchmark rate in an effort to tame inflation.

The interest rate for a new vehicle loan hit 10.48% in September, up from 9.51% in January, as per Cox Automotive. The average financing rate for a used vehicle was 11.4% last month, according to Edmunds.

In total, Americans carried $20 billion in auto loan debt in the second quarter of this year, based on the most recent data from the Federal Reserve Bank of New York.

Implications for banks and insights from S&P Global Ratings

Delinquent car payments aren’t just a problem for drivers. Banks with a high proportion of auto loans in their portfolio could see rising losses if Americans can’t pay off their vehicle debt, as per analysts from S&P Global Ratings.

“A variety of factors — such as high interest rates, high loan balances, falling used car prices, consumers’ declining savings rates and a likely economic slowdown — will result in further deterioration in auto loan and lease performance,” S&P Global Ratings said.

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The scenario highlights the economic challenges faced by many Americans, showing that the recovery is yet to be felt by all, with debts continuing to be a heavy burden for many, especially amid high inflation and rising interest rates.

With information from CBS News

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