Auto loan delinquency in the first quarter of 2023 exceeded the high watermark set in 2009 and 2010, with more than 1.69 percent of loans 60 days past due. According to S&P Global Mobility, that percentage tops the high of 1.46 percent during the Great Recession and a rate of 1.43 percent recorded in the first quarter of 2021.
The increase is primarily due to subprime loans on used vehicles, with independent lenders taking the brunt of the hit. High-interest rates are partly to blame, as is inflation which has led to increased prices in the used car market. Also playing a factor is that car loan debt has recently reached record highs.
"The interest rate rise is squeezing the monthly budget for the average American consumer," said Jill Louden, product management associate director for S&P Global Mobility. "Consumers set aside money monthly for housing, vehicles, and insurance but may not pay other obligations with the same frequency, such as medical bills and credit cards. People need their vehicles to get to work to make money and pay their obligations."
Auto lenders do not plan to relax borrowing requirements in the near term. Delinquent car loans and repossessions have increased over the past year. This has led many lenders have retreated from the subprime space. In fact, according to TransUnion/S&P Global Mobility AutoCreditInsights, the high delinquency rate is encouraging finance companies, including banks, credit unions, and independent lenders, to tighten underwriting standards.
During the pandemic, the combination of rising interest rates and lower used-car inventories led to increased borrowing and higher payments. At the same time, it also led to a decrease in loan originations. In all, there were 15.3 percent fewer originations in the fourth quarter of 2022 than in the same time period in 2019, according to S&P Global Mobility.
Meanwhile, lenders are continuing to approve longer-term loans on new and used vehicles, with companies like Honda providing 84-month financing. Dealers and independent companies are also pushing products like gap insurance and extended warranties which are typically highly profitable but also offer some consumer benefits.
