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The Auto Loan Debt Crisis: A Warning Sign of Broader Economic Troubles
New data reveals that auto loan delinquencies have hit a 3-decade high, signaling growing financial distress among American consumers.
In September 2022, 6.11% of auto loan borrowers were at least 60 days late on their payments according to a report from Fitch Ratings. This marks the highest delinquency rate since the early 1990s, rising significantly from 5.93% in January 2022.
Being 30 days late on a bill can sometimes just mean you misplaced the payment or are floating your paycheck for a bit. But being 60 days late often indicates more serious financial struggles – that borrowers simply cannot afford their auto loans.
Vehicle repossessions are also expected to increase dramatically. Cox Automotive estimates 1.5 million cars will be seized in 2023, up 20% from 2022.
Rising delinquencies and defaults on auto loans likely foreshadow broader economic pain on the horizon. People often tap into home equity or take out second mortgages when they cannot pay other debts. If Americans cannot even afford their car payments, it suggests they are struggling financially in major ways.
Currently, around 50% of all mortgages still have interest rates below 4%. But over 20% now carry rates above 5%, and that share is growing quickly as rates rise. Borrowers with ultra-low rates will slowly disappear.
Mortgage officers should prepare for this shift and accept that extremely low rates below 4% are likely gone for good. Instead of holding out hope for a return to 3% rates, they should embrace the new normal of 6-7% interest rates.
In short, Americans are increasingly missing debt payments and facing repossessions. This consumer debt distress signals challenging economic times ahead. Mortgage brokers and others must adapt to higher interest rates rather than wait for a return to historically low rates. Consumers need help navigating these tougher conditions.
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