In a landscape where financial stability is crucial, alarming trends in Americans’ personal finances are surfacing, and the latest spotlight falls on the surge in auto loan delinquency rates. Recent data reveals a concerning figure – a staggering 6.1% of subprime borrowers are now at least 60 days overdue on their car payments, marking the highest percentage since 1994.
In the face of what seems like an “auto loan crisis,” recent data unveils a surge in Americans searching for “give car back” at unprecedented levels. This trend, initially spotted on X (formerly Twitter), underscores a growing concern about the financial strain on car owners.
The Alarming Financial Landscape
Record-High Average Payments
During the first quarter of 2023, the average car payment for new vehicles in the U.S. skyrocketed to a record-high of $725. This marks an 11.5% increase compared to the same period last year. For leased vehicles, Americans are grappling with an average payment of $586, reflecting an 11.2% increase. Meanwhile, the average payment for used vehicles stands at $516, showing a more modest 2.2% increase, as per recent data from LendingTree.
Auto Loan Debt Surge
Post-Covid-19, amidst inflation and rising interest rates, Americans are shouldering a substantial burden of auto loan debt. According to the Federal Reserve Bank of New York, auto loans now rank as the third-largest debt for Americans, with mortgages leading and student loans following closely behind.
Factors Fueling Late Car Payments
Escalating Car Prices
One significant contributor to this financial turmoil is the rapid escalation of car prices in recent years. According to Kelley Blue Book, the average cost of a new car reached $47,899 in September, marking a substantial 23.6% increase over the past three years.
Soaring Interest Rates
Compounding the issue is the surge in interest rates, with the current rate for a new auto loan standing at 7.5%, a significant jump from the 4.2% recorded just three years ago.
Escalating Delinquency Rates
To put these developments into perspective, Experian reports that the average monthly car payment has now skyrocketed to an eye-watering $725. Furthermore, Edmunds data reveals that a record 17.5% of borrowers grapple with monthly payments of $1,000 or more.
Worryingly, auto loan delinquencies reached 7.3% in the second quarter of 2023, surpassing pre-pandemic levels. This underscores the financial challenges Americans are facing in meeting their auto loan obligations.
Unpacking the Rise in Car Loan Rates
Federal Reserve’s Impact
Sarah Foster, a senior U.S. economy reporter at Bankrate, sheds light on the factors contributing to the surge in car loan rates. She attributes it to the Federal Reserve’s core duty of maintaining purchasing power by raising interest rates, a phenomenon not witnessed since 2008.
Economic Pressure on Paychecks
The economic strain is taking a toll on American paychecks, with a LendingClub report indicating that 62% of Americans are living paycheck to paycheck.
Tumbling Used Vehicle Values
Compounding the challenges, the Manheim Used Vehicle Value Index (MUVVI) plummeted to 205.0 in November 2023, marking a 5.8% drop from the previous year. Wholesale used-vehicle prices experienced a 2.1% month-on-month decline. Since early 2022, used-car values have nosedived by more than 20%, placing many Americans in the precarious position of holding depreciating assets.
Unveiling the Financial Quagmire
Escalating Interest Rates and Plummeting Vehicle Values
The U.S. car loan market is grappling with a formidable challenge, as climbing interest rates collide with plummeting vehicle values. Borrowers find themselves in an increasingly precarious financial situation as the gap widens between the outstanding value of their debt and the market value of their cars.
“Negative Equity” at Record Highs
This troubling phenomenon, commonly known as “negative equity” or being “underwater,” has reached its highest level since April 2020, according to reports from Edmunds.com Inc. In November, the average negative equity soared to a record $6,054, marking the highest figure since April 2020, as reported by Bloomberg citing Edmunds.com.
A Deep Dive into the Challenges
Auto Loan Debt on the Rise
Auto loan debt has now secured its position as the third-largest category of consumer debt, trailing only mortgages and closely approaching student loans. The Federal Reserve Bank of New York discloses that Americans collectively owe a staggering $1.595 trillion in auto loan debt, constituting 9.2% of the nation’s consumer debt.
Economic Barriers
Access to a car is essential for countless Americans, especially those in areas with limited public transportation options. However, exorbitant prices of both new and used vehicles have rendered car ownership unattainable for many low-income workers.
Skyrocketing Interest Rates
Adding to the plight, interest rates for those with “deep-subprime” credit scores can soar as high as 21.18% for used cars, according to data from Experian Credit Solutions, republished by NerdWallet.
| Credit Score | Avg APR New Car |
Avg APR Used Car |
| Superprime: 781-850 | 5.61% | 7.43% |
| Prime: 661-780 | 6.88% | 9.33% |
| Nonprime: 601-660 | 9.29% | 13.53% |
| Subprime: 501-600 | 11.86% | 18.39% |
| Deep subprime: 300-500 | 14.17% | 21.18% |
Industry Insights: CarMax’s Role
As a significant player in the used car retail sector, CarMax’s performance becomes a valuable barometer for the state of the U.S. auto market amid the ongoing negative equity crisis.
Investors are closely watching CarMax Inc.’s (NYSE:KMX) after their earnings report, released on Thursday, Dec. 21, 2023. The estimated earnings per share (EPS) at $0.43, signaled a 3% decline from the same quarter last year. Quarterly revenue estimates stand at $6.3 billion, reflecting a 4% decrease from a year ago.
Conclusion
In summary, the U.S. car loan market is navigating a complex landscape marked by rising negative equity, delinquency rates, and economic barriers. Keeping an eye on CarMax’s earnings, the industry remains at the forefront of economic scrutiny, providing insights into the ongoing challenges faced by both borrowers and the automotive sector. A strange atmosphere pre-2007/2008 seems to take hold in the market, could it be that a new crisis is about to unravel? If so, have some cash ready to invest.