While vehicle prices have been going up, auto loan delinquency rates have remained surprisingly low for the first two years of the pandemic.
Unfortunately, this is no longer the case. As the Federal Reserve works to address growing inflation, more borrowers are falling behind on their auto loans, and we can expect delinquency rates to return to normal pre-pandemic levels over the coming months.
Why did auto loan delinquency rates remain steady?
Following the February Fed meeting, new data indicated that government assistance helped play a key role in keeping delinquency rates steady over the past two years. Because many of the Americans receiving extra assistance during this time also fall under the subprime category, it meant fewer loan originations.
Here’s how the federal relief efforts impacted auto delinquency rates.
Missing loan originations
Across the board, most auto delinquencies come from borrowers with low credit scores. So, with fewer low-credit borrowers getting new loans, delinquency rates remained fairly low. Many low-credit borrowers did not finance new loans due to less demand for a vehicle with stay-at-home orders and more stringent acceptance criteria implemented by lenders.
The findings following the recent Fed meeting reinforce this assumption. Much of the end of 2020 and start of 2021 were made up of a lower number of loan originations. These “missing originations” — as the Fed described them — meant fewer delinquency rates. If drivers that tend to fall subject to repossession or defaulting on their loans are not borrowing, fewer delinquencies will occur.
This combined with federal assistance and lenders extending leniency on payments, meant fewer delinquent loans and originations.
According to the TransUnion annual forecast, the expected auto originations will be around 28.9 million — up from the past three years. Because of this increase and the lack of federal assistance, there will likely be a rise in delinquencies.
Fewer subprime borrowers
Subprime borrowers fall between 501 and 600, according to Experian. In Q1 of 2022, total loans and leases taken out by all subprime borrowers — including deep subprime — falls to just over 17 percent. Separated out, deep subprime hit a record low rate of 2.12 percent.
2022 delinquency rates expected to rise
The strong credit trends during the pandemic are returning to normal levels, exemplified by auto loan performance in January. According to Cox Automotive’s weekly insight from mid-February, loans more than 60 days delinquent have been increasing steadily over the past eight months, and January saw a 2.9 percent increase compared to a year earlier.
But normal does not necessarily mean good. As these numbers show, rates of delinquency are inching higher each coming month — especially for subprime drivers.
Subprime borrowers are those most directly affected by inflation and likely can be vulnerable to lenders. Currently, it is vital to stay up to date on your loan payment to avoid the risk of defaulting on your loan and losing your vehicle.
The good news is that these increased delinquencies have not yet led to an increased number of drivers defaulting on their loans at pre-pandemic levels. But vehicle availability and access to credit will likely shift the coming 2022 landscape.
How to avoid falling behind on your auto loan
The used car market is hot right now and can be a good option to save money. But if you decide to take out a loan with a shorter term, then it is usually wise to make a large down payment to avoid unmanageable monthly payments.
Also, if it becomes challenging 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 becoming underwater on the loan — owing more than it’s worth.
The bottom line
Delinquencies have been low through the first two years of the pandemic. The primary reasons for the lower rates of default are fewer borrowers, and more government assistance for borrowers who would normally have issues making payments. With assistance ending and more people in search of vehicles — and by extension, financing — there will likely be a steady increase in delinquencies over 2022.