Millennials and Generation Z seem to be at the center of the zeitgeist when it comes to fashion, culture and trends. But the ascending generations aren’t immune to growing inflation and its repercussions. 

A recent report from Jerry found that last year, Gen Z and millennials were 90 days past due on $20 billion in auto loans. Although many factors outside the drivers’ control influenced this number, their buying habits play a role too.

Car Outline
What does it mean to be delinquent on an auto loan?
Being delinquent is when you’re behind on your auto loan payments. Once you are delinquent long enough, your loan will go into default, and the lender will step up collection efforts.

Young people are falling behind on auto loan payments

The number of drivers becoming delinquent on their auto loans following the pandemic has been on a steady rise over the past few years. The combination of higher vehicle prices, steep interest rates and a decline in pandemic-related support left many drivers behind on their in 2022. 

One population that has been especially affected is drivers between ages 18 and 39 — millennials and those in Generation Z. 

Serious delinquency, defined as being 90 days overdue on a loan, for drivers between 18 and 29 reached a five-year high at the tail-end of 2022, according to research from Jerry. Those in the 30 to 39 age range hit their own three-year record high. 

One influence is the sheer number of young people who took out car loans in 2022. Drivers under 40, for example, took out the highest total dollar value of auto loans recorded. Higher vehicle prices also played a role. Data from Kelley Blue Book showed average new prices were higher throughout 2022 than in 2021.

Due to these combined factors, total loan balances rose about 31 percent for 18- to 29-year-olds and 29 percent for those 30 to 39. But the younger generations are facing rising car payments, insurance costs and overall vehicle expenses thanks to widespread inflation.

Inflation drives delinquency 

As with most facets of modern spending, inflation has its hand in making finances more challenging. While moves made by the Federal Reserve to quell inflation don’t directly impact auto loan rates, they do impact the cost for banks to lend money. As the Federal funds target rate grew throughout the last year, sitting at 4.5-4.75 percent as of Feb. 1, 2023, borrowers had to adapt to higher rates. 

Henry Hoenig, data journalist for Jerry, points to increased inflation as the main culprit in the large jump in delinquency over the past year.

“It’s had such a wide-ranging impact, driving up prices across the board and, as a result, pushing up interest rates on credit card debt and loans,” explains Hoenig. 

On top of that, budgets are being stretched much thinner as “everything is much more expensive, rent is higher, groceries are higher, car-ownership costs such as insurance and repairs are all much higher. It all adds up,” he notes. 

The impact of inflation on all facets of spending caused more young drivers to become delinquent on their loans. 

That’s despite borrowers’ best efforts to adapt their spending and afford their vehicle loans. Two-thirds of Americans the Jerry team surveyed said they cut spending on other areas due to the steep cost to own and operate a car. 

Attitudes towards taking on debts

Young peoples’ willingness to take on debt may also influence their increased delinquency rates. 

Compared to older generations, young people seem to feel much more comfortable taking on debt to finance their expenses. This can be seen in the surge in buy now, pay later spending options among younger generations. More than 40 percent of users fall into the 18 to 35 age range, according to data from the Federal Reserve

In the years after the global financial crisis, many millennials, like many Americans, had soured on debt. But people have short memories, especially when they want to make a major purchase like a car. — Henry Hoenig, Jerry data journalist

While Jerry’s research did not directly dive into this topic, Hoenig agrees that it is probably the case. In the early days of the COVID-19 pandemic, many lenders lowered their required credit scores, which opened the doors to younger borrowers.

And government stimulus funding may have increased young folks’ financial confidence. This extra cash also allowed many to come up with a vehicle down payment. 

“In the years after the global financial crisis, many millennials, like many Americans, had soured on debt,” says Hoenig. “But people have short memories, especially when they want to make a major purchase like a car.”

And this memory loss coupled with low rates at the start of the pandemic led to many more young people signing off on loans. But that “why not” mentality, as Hoenig calls it, was a risk, especially once “inflation reared its ugly head.”

How much are millennials and Gen Z spending on their cars? 

Thanks to high prices and rates, much of millennials’ and Gen Zers’ paychecks are going toward their auto loan payments. Though all generations feel inflations’ pinch, young people tend to make less money than people aged 45 to 54.

“Less than half of Gen Z car payments are under the recommended threshold of 10 to 15 percent of their take-home pay,” shares Hoenig. 

And even those who can afford their car payments may struggle in other aspects of their finances. 

“Half of Gen Z and a third of Millennials said high car-ownership costs made them more than 30 days late on at least one debt or rent payment last year,” says Hoenig.

The bottom line 

Pandemic-related support left many young people with boosted financial confidence, but once inflation caught up, the tables were flipped. The dramatic surge in auto loan delinquency Jerry found mirrors an increase in debt taken on by 20 to 40-year-olds, with credit card delinquency also already reaching record highs. 

As a young borrower with potentially less-established and lower credit, it is important to approach borrowing with extra care. When it comes to auto loans, compare a multitude of lenders, consider your budget and don’t forget to factor in unexpected vehicle costs.