A recent TransUnion study points to a potentially worrying trend in the auto loan market – bad debt rates are rising. Nearly 3.5% of auto loan customers are late on their payments.
A rising delinquency rate could indicate that households are struggling with debt, especially as paying off the car loan is a high priority for many households. However, if you’re struggling to pay off all your debt, consider paying off the most expensive debt first – and for most people, that means credit cards.
Nearly 3.5% of car loans are in default
The current TransUnion study found that in Q2 2022, 3.34% auto loans were overdue by more than 30 days and 1.43% were overdue by more than 60 days. This is the highest rate in five years and a significant increase in the last two years.
TransUnion has suggested a number of reasons for this increase. First, they point out that there was likely an accumulation of bad debts created by the pandemic. Many people who may have defaulted on their car loans during the pandemic didn’t because government bailouts, stimulus programs, or car loan providers offered temporary help to their customers.
Second, the total number of auto loans has declined since 2018, even though the number of delinquent auto loans is at its highest level in five years.
Pandemic
This is partly due to limited supply during and immediately after the pandemic, which has meant many customers have struggled to find a car to finance. This is also related to the rising cost of new vehicles – the average cost of a new vehicle is over $48,000, a record.
Car loans are also becoming more expensive due to rising interest rates. Last month, the weighted average interest rate on auto loans across all loan types increased by 2.8 percentage points to 10.6%.
People with poor credit ratings will likely be hit the hardest by these rate hikes. In October, a deep subprime borrower with a credit score below 580 saw an average rate of 18.2% on a new car loan and 21.8% on a used car loan.
Bottom line: It seems that many people who may have defaulted on their car loans during the pandemic but were kept solvent by stimulus payments are now doing so. At the same time, the total number of car loans is decreasing. Both factors combined mean that the default rate is at an all-time high.
Should I prioritize the car loan?
The TransUnion study also revealed some interesting data about how consumers prioritize their payments.
The study found that most people consider paying off their monthly car loan one of their most important financial obligations – right after paying off their mortgage and far more important than paying with a credit card.
And that makes sense. Car loan payments are tied to a tangible asset – a vehicle – that you already use.
Furthermore, the rise in car prices over the past year means that many people are actually in a mortgage lending positive position: meaning their car is worth more than the loan they took out to buy it. These two factors explain why paying off the car loan is a top priority for many families.
Consumers should be careful when prioritizing unsecured debt over the car loan. If you’re having trouble paying off your car loan , your lender may offer flexibility with your payments, so you’ll want to check with them before missing a payment.
If you miss a payment, your lender will likely impose a penalty and eventually repossess the vehicle if the loan defaults.
As with all types of debt, bad debt can negatively affect your credit score, so it’s important to have an adequate budget to meet your loan obligations.