Auto loan delinquencies: what changed in 2022
While vehicle prices have risen, auto loan default rates have remained surprisingly low for the first two years of the pandemic.
Unfortunately, this is no longer the case. As the Federal Reserve scrambles to fight rising inflation, more borrowers are falling behind on their auto loans, and we can expect delinquency rates to return to normal levels by ahead of the pandemic over the next few months.
Why have auto loan delinquency rates remained stable?
Following February’s Fed meeting, new data indicated that government assistance has helped play a key role in keeping delinquency rates stable over the past two years. Since many Americans receiving extra aid during this time also fall into the subprime category, this meant fewer loans.
Here’s how federal relief efforts have impacted auto crime rates.
Missing loan origins
Overall, most auto delinquencies come from borrowers with low credit scores. So, with fewer low-credit borrowers getting new loans, delinquency rates have remained fairly low. Many low credit borrowers have not funded new loans due to lower demand for a vehicle with stay-at-home orders and tighter acceptance criteria implemented by lenders.
The conclusions of the recent Fed meeting reinforce this hypothesis. Much of late 2020 and early 2021 was made up of fewer loans. These “missing origins” — as the Fed described them — meant lower delinquency rates. If drivers who tend to repossess or default on their loans don’t borrow, fewer defaults will occur.
This, combined with federal aid and lenders extending leniency on payments, has resulted in fewer delinquent loans and origins.
According to TransUnion’s annual forecast, expected auto creations will be about 28.9 million, up from the past three years. Due to this increase and the lack of federal assistance, there will likely be an increase in delinquencies.
Fewer subprime borrowers
Subprime borrowers range between 501 and 600, according to Experian. In the third quarter of 2021, total loans taken by subprime borrowers fell to 17% and deep subprime loans reached an all-time high of 15.13%.
Crime rates in 2022 expected to rise
Strong credit trends during the pandemic are returning to normal levels, as evidenced by the performance of auto loans in January. According to Cox Automotive’s weekly information in mid-February, loans over 60 days past due have increased steadily over the past eight months, and January saw a 2.9% increase over the previous year. .
But normal does not necessarily mean good. As these numbers show, delinquency rates are increasing with each coming month, especially for subprime drivers.
Subprime borrowers are the most directly affected by inflation and may likely be vulnerable to lenders. Currently, staying current on your loan payment is essential to avoid the risk of defaulting on your loan and losing your vehicle.
The good news is that this increase in delinquencies has not yet led to an increase in the number of drivers defaulting on their loans to pre-pandemic levels. But vehicle availability and access to credit will likely change the landscape for 2022 ahead.
How to avoid falling behind on your car loan
The used car market is booming right now and can be a good option to save some money. But if you decide to take out a loan with a shorter term, then it’s usually wise to make a large down payment to avoid unmanageable monthly payments.
Also, if it becomes difficult to make your monthly payment, consider refinancing your loan. Keep in mind that extending your term also increases the amount of interest you pay over the life of the loan.
By purchasing a used vehicle, drivers can own a high quality vehicle at a much lower price. And, since new cars depreciate quickly in the first year or two, you’re more likely to avoid getting underwater on the loan — owing more than it’s worth.
The bottom line
Delinquencies were low in the first two years of the pandemic. The main reasons for the decline in default rates are fewer borrowers and increased government assistance to borrowers who would normally have trouble making payments. With support ending and more people looking for vehicles – and by extension, financing – there will likely be a steady increase in chargebacks in 2022.