US Auto Loan Defaults Surge as Car Owners Struggle Amid Soaring Rates

Economic uncertainty has hit US car owners, impacting consumer spending and triggering repossession concerns. Factors like dwindling tax returns, job market volatility, and inflation are contributing to this surge, making it harder for low-income workers to afford reliable transportation.

In a disconcerting turn of events, the rate at which Americans are defaulting on their auto loans is at the highest level in nearly 30 years.

Rising interest rates are causing financial strain for many US car owners, making loan payments harder to afford. This reflects economic uncertainty, especially regarding consumer spending.

Fitch Ratings reported that in September, the proportion of high-risk auto loan recipients at least 60 days behind on their loans had risen to 6.11 percent. This is the highest figure recorded since data tracking began in 1994, with the previous peak registered in April.

Nonetheless, the surge in delinquency among car owners has been observed, resulting from dwindling tax returns, a volatile job market, and the ongoing challenge of soaring inflation.

The recent upswing in the automotive sector can be traced to the concurrent escalation of car prices and lending expenses. The Federal Reserve's stance on maintaining increased interest rates for an extended period is poised to exacerbate the issue. This challenge is further underscored by the recent reinstatement of federal student loan payments for millions of Americans.

“The subprime borrower is getting squeezed…They can often be a first line of where we start to see the negative effects of macroeconomic headwinds,” stated Margaret Rowe, senior director with the asset-backed securities group at Fitch.

High prices for new and used cars, which have only slightly decreased from pandemic peaks, make it difficult for low-income workers, who rely on cars to commute to work, to afford adequate transportation in areas without reliable public transit options.

Interest rates for individuals with excellent credit scores average around 5.07 percent for new cars and 7.09 percent for used vehicles, as per Bankrate. However, those with poor credit face significantly higher rates, averaging 14.18 percent for new cars and 21.38 percent for used ones.

Average US auto loan interest rates by credit score

© Photo : Bankrate.com

The spike in payment delinquencies is set to trigger a corresponding rise in repossessions. Cox Automotive's latest estimates suggest that around 1.5 million vehicles will undergo repossession in 2023, representing a noticeable rise from the 1.2 million recorded in 2022. Despite the uptick, it is worth noting that this number remains below the levels recorded before the pandemic.