Latest reports suggest that there is a significant increase in the number of Americans struggling to make their car payments, the highest since the Great Recession. This is largely due to the high cost of both new and used cars, coupled with rising interest rates and persistent inflation that is putting pressure on household budgets.
According to Fitch Ratings, the percentage of subprime auto borrowers who were 60 days late on their payments increased to 5.67% in December 2022, up from a seven-year low of 2.58% in April 2021.
Rising car prices, attributed to a semiconductor shortage and COVID-19-induced disruptions in the global supply chain, have contributed to the increase in the cost of owning a car. Although prices started to subside towards the end of 2022, the average cost of a new car still remains near $50,000, a record high.
The rapid rise in interest rates has further compounded the problem, with the average new auto loan rate increasing to 8.02% in December 2022, up from 5.15% in the previous year. This has resulted in a significant percentage of consumers paying over $1,000 per month for their cars, a record high according to Edmunds.com.
American car payment crisis: During and after the great recession
The Great Recession of 2008 had a significant impact on the American economy, including the automotive industry and car payments. The crisis, fueled by toxic assets in financial institutions and a declining GDP, forced businesses to reduce expenses and investments, leading to widespread job losses and reduced demand for products.
This, in turn, led to millions of Americans losing their homes, jobs, and savings, causing poverty rates to increase from 12.5% in 2007 to over 15% in 2010.
However, following the recession, the situation of car payments improved gradually as the economy recovered. The government implemented several initiatives to stimulate growth and create jobs, including the American Recovery and Reinvestment Act. Financial incentives, such as low-interest loans, were also offered to encourage consumers to purchase cars, which helped increase demand and stabilize the automotive industry. The improved job market and growing economy also led to an increase in consumer confidence, further boosting spending and car purchases.
By the end of the decade, the US auto industry was thriving, and the number of people struggling to make car payments had decreased significantly. For example, in 2010, over 6 million American consumers had defaulted on their car loans, while in 2018, the number dropped to just over 2 million. This decrease in car payment defaults reflects the effectiveness of the government’s efforts to revive the economy and the automotive industry.
Moreover, the growth of the sharing economy and the popularity of alternative transportation options, such as ride-sharing and electric scooters, have also contributed to the decline in car ownership and payments. A survey conducted by the National Bureau of Economic Research found that ride-sharing services have reduced the number of miles driven by personal vehicles by up to 9%. This shift towards alternative modes of transportation has further reduced the financial burden of car ownership for American consumers.
Average monthly car payment: How has it changed over time?
The average monthly car payments in the US, as Experian reported, increased significantly year over year in the third quarter of 2022. The average monthly car payment for new vehicles increased by 13.3%, used vehicles by 11.2% and leased vehicles by 12.1%. This has led to average monthly car payments of $700, $525, and $567, respectively. The increases in car payments are not as severe as the increases in vehicle prices. The prices of new vehicles have gone up by 8.4% YoY, while used vehicle prices have increased by 2%.
On the other hand, auto loan debt is the third-largest category of debt in the US, after mortgages and student loans. Americans owe a total of $1.52 trillion in auto loan debt, accounting for 9.2% of American consumer debt. The majority of retail vehicle financing is carried out by borrowers with prime credit scores (661 and higher), who account for 66.0% of retail vehicle financing, according to Experian. The average auto loan term is 69.7 months for new cars, 68.1 months for used cars, and 35.9 months for leased vehicles. The delinquency rates of auto loans continue to drop, with 3.9% of outstanding auto debt at least 90 days late and 6.2% overdue by 30 days.
Current car payment crisis vs similar crises in the past
The car payment crisis in the US is affecting a larger number of Americans than during the Great Recession, according to the New York Federal Reserve. Over 7 million Americans were over 90 days behind on their vehicle loans at the end of 2018, with the number of delinquencies rising along with the increase in total auto loan debt, which reached $584 billion.
The credit quality, on the other hand, has improved, with the higher end of the spectrum holding 30% of the $1.27 trillion in total auto debt.
Rising costs, interest rates, and inflation are putting pressure on household budgets and leading to an increase in the number of Americans struggling to make their car payments. Fitch Ratings reported that the percentage of subprime auto borrowers who are 60 days late on their payments increased to 5.67% in December 2022, up from 2.58% in April 2021.
The average new auto loan rate also increased to 8.02% in December 2022, up from 5.15% in the previous year. The shift towards alternative modes of transportation and the growth of the sharing economy have also reduced the financial burden of car ownership for American consumers.
However, the improved job market and growing economy, along with initiatives to stimulate growth and low-interest loans to encourage car purchases, have helped increase demand and stabilize the automotive industry.
How long will this crisis last?
The current car payment crisis in the US is reminiscent of the situation during the Great Recession. The high cost of new and used cars, coupled with rising interest rates and persistent inflation, has led to a significant increase in the number of Americans struggling to make their car payments, the highest since the Great Recession.
Similar to 2008, the economic crisis is affecting the automotive industry and car payments. As mentioned earlier, in December 2022, the percentage of subprime auto borrowers who were 60 days late on their payments increased to 5.67%, up from a seven-year low of 2.58% in April 2021.
Rising car prices, attributed to the semiconductor shortage and COVID-19-induced disruptions in the supply chain, have contributed to the increase in the cost of owning a car. The average cost of a new car remains near $50,000, a record high, and the average new auto loan rate increased to 8.02% in December 2022.
After the Great Recession, the US economy gradually improved, with the government implementing several initiatives to stimulate growth and create jobs. Low-interest loans and other financial incentives were offered to encourage consumers to purchase cars, boosting demand and stabilizing the automotive industry. The improved job market and growing economy also led to an increase in consumer confidence, further boosting spending and car purchases.
By the end of the decade, the number of people struggling to make car payments had decreased significantly, and the US auto industry was thriving. In 2010, for instance, over 6 million American consumers had defaulted on their car loans, while in 2018, the number dropped to just over 2 million.
The growth of the sharing economy and alternative modes of transportation, such as ride-sharing and electric scooters, have also contributed to the decline in car ownership and payments. A study by the National Bureau of Economic Research found that ride-sharing services have reduced the number of miles driven by personal vehicles by up to 9%.
It remains to be seen whether the current car payment crisis will follow the same path as the Great Recession, but it’s crucial for policymakers and industry leaders to monitor the situation closely and take proactive steps to support American consumers and the automotive industry.
Resolution and potential long-term effects
The current car payment crisis has the potential to have long-lasting effects on the US economy and automotive industry. While there are factors that may resolve the crisis, such as improved economic conditions and increased access to credit, it is uncertain what the ultimate outcome will be.
The Federal Reserve Bank of New York found that household debt payments relative to disposable income have improved in recent years, yet consumer spending is still likely to be impacted, with a decrease in consumer confidence and a shift towards saving as a result of the economic uncertainty caused by the crisis. The University of Michigan’s consumer sentiment index, for instance, fell from 101.0 in February 2020 to 79.2 in April 2020, reflecting a decrease in consumer confidence.
The employment situation is also likely to be impacted by the crisis, with data showing a significant increase in unemployment levels. The Bureau of Labor Statistics reported that the unemployment rate had increased from 3.5% in February 2020 to 14.8% in April 2020, reflecting a loss of more than 20 million jobs. This was sugested to result in decreased consumer spending and a decline in employment levels within the automotive industry. For instance, manufacturers and dealerships may reduce production and lay off workers as demand for vehicles decreases.
The crisis may also have an impact on the environment, as it may lead to a slowdown in the transition to clean energy and electric vehicles. The decrease in demand for vehicles and investment in the automotive industry, for example, may result in a slowdown in the development of electric vehicles, as manufacturers focus on meeting their immediate financial needs. This could obviously have long-term consequences for the environment, as it may lead to a continued reliance on fossil fuels, which are a significant contributor to air pollution and climate change. To minimize the impact and ensure a sustainable recovery, careful consideration and planning will be necessary, such as implementing initiatives to make car ownership more affordable, expanding access to financing options, and investing in the development of more fuel-efficient and environmentally-friendly vehicles.
Conclusion
The rise in car prices, interest rates, and inflation is causing a growing number of Americans to struggle with their car payments, surpassing the levels seen during the Great Recession. The average new auto loan rate hit an all-time high of 8.02% in December 2022, and the average monthly car payment for new vehicles increased by 13.3% YoY. Despite this, the credit quality of auto loans has improved, with more retail vehicle financing being done by borrowers with prime credit scores. The current car payment crisis highlights the need for financial literacy and proper budgeting, especially in challenging economic times.
