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DELINQUENCY RATES AT HIGHEST LEVEL IN ALMOST 30 YEARS

Auto Loans
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Jinda Noipho/Getty Images
4 min read Published November 29, 2023

Written by
Rebecca Betterton
Written by Rebecca BettertonArrow Right Writer, Auto Loans and Personal Loans
Rebecca Betterton is a writer for Bankrate who has been reporting on auto loans
since 2021. Through her writing, Rebecca aims to provide clarity and
accessibility to the automotive loans industry as the cost to finance new and
used vehicles continues to climb due to steep inflation.
 * Connect with Rebecca Betterton on Twitter Twitter
 * Connect with Rebecca Betterton on LinkedIn Linkedin
 * Get in contact with Rebecca Betterton via Email Email

Rebecca Betterton

Edited by
Pippin Wilbers
Edited by Pippin WilbersArrow Right Editor, Auto Loans
Pippin Wilbers is a Bankrate editor specializing in auto loans. Pippin is
passionate about demystifying complex topics, such as car financing, and helping
borrowers stay up-to-date in a changing and challenging borrower environment.
 * Connect with Pippin Wilbers on LinkedIn Linkedin
 * Get in contact with Pippin Wilbers via Email Email

Pippin Wilbers
Bankrate logo


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The last time this many drivers were delinquent on their auto loans was when the
first mobile flip phone entered the market — in October of 1996. That’s
according to new data from Fitch Ratings examining the percentage of borrowers
at least 60 days past due on their loans in 2023’s third quarter.

And some borrowers are at a higher risk than others. Here’s what caused this
surge and how to decrease your risk of falling behind on your loan.


SUBPRIME AUTO LOAN DELINQUENCIES SURGE

According to Experian, borrowers with a FICO score between 501 and 600 fall
under the subprime category. Lenders see subprime borrowers as a greater
financial risk. Their low scores often indicate past problems with repaying
credit. To offset the risk, lenders charge these borrowers higher interest
rates.




All borrowers must contend with economic factors such as more expensive vehicles
and climbing interest rates. But subprime borrowers, with their extra-high
interest rates, face the brunt of increased expenses.

The result has been a dramatic increase in the percentage of subprime borrowers
falling at least 60 days past due on their auto loans.

In January 2023, 5.93 percent of subprime borrowers were delinquent, compared to
only .28 percent for prime borrowers. In September, that percentage jumped to
6.11 percent for subprime borrowers, according to Fitch Ratings.

The significant increase in delinquency represents the challenge many Americans
face — especially those resigned to higher rates due to poor credit. As subprime
borrowers struggled to make the payments, many faced delinquency.






WHAT’S DRIVING THE SURGE?

Two primary factors contributed to growing delinquency rates. First is lingering
high vehicle prices, and the second is high interest rates.

Vehicle prices have dropped slightly since this time last year. Used prices are
down 4 percent and new, just over 1 percent, according to Kelley Blue Book. But
these prices are still dramatically above pre-pandemic levels.




These high prices could serve as a problem on its own, but combined with high
interest rates borrowers, it is unspringing that borrowers are struggling to
make monthly payments.

Despite the higher prices, subprime drivers in 2022’s third quarter had slightly
lower average monthly payments than they do now, thanks to lower interest rates.

A few factors drive the interest rate that borrowers receive. These include
credit background, vehicle price, the down payment and macroeconomic factors
that impact lenders’ borrowing costs. Rates are up year over year for drivers
across the credit spectrum.

> High interest rates continue to help drive up monthly payments for both used
> and new vehicles. — Satyan Merchant, SVP and automotive business leader at
> TransUnion

Subprime borrowers held an average rate of 11.72 percent for new cars and almost
19 percent for used, according to Experian second quarter data. By comparison,
the average for all borrowers was 6.63 percent in the same quarter.

Merchant says high interest rates and cross-wallet inflation will likely be
around for a while. And more significantly, “affordability will continue to be a
challenge, particularly among below-prime consumers.”

The higher the interest rate is, the more expensive your monthly payment will
be, which can increase the likelihood of falling delinquent on your loan.


CALCULATE YOUR EXPECTED MONTHLY PAYMENT BEFORE FINANCING

Take the time to calculate your expected monthly payment before securing
financing to avoid the risk of delinquency.

Calculate my payment


INCREASE IN VEHICLE REPOSSESSION

So what happens to the over 6 percent of subprime borrowers who were 60 days
past due on their auto loans in September? Most drivers who become delinquent
see a dip in their credit score, and some may have their vehicles repossessed.

Your loan agreement lays out when you are considered in default on your loan. It
might happen after you miss a single payment or 120 days after your last
payment. Most states allow lenders to repossess a vehicle as soon as you’re in
default — but many lenders are reluctant to start that expensive process if
there’s a chance you’ll resume payments.

This year, the volume of repossessed vehicles increased slightly to 1.5 percent
of secured loans, according to Cox Automotive data. The percentage still remains
below pre-pandemic levels but has been slowly rising since 2021, when it dropped
due to pandemic-related pauses and fell to 1.1 percent. The context here is
important: not every delinquent auto loan turns into a default, and not every
default will lead to repossession.

Either way, your credit score will take a hit if you fall behind on your loan,
making securing financial products more challenging.


HOW TO AVOID DELINQUENCY ON YOUR AUTO LOAN

The higher delinquency rates among subprime borrowers paint a picture of auto
loan ownership’s difficulties. Consider the following tips to avoid falling
delinquent on your auto loan.

 * Stay in contact with your lender. If you feel that you may be at risk of
   missing monthly payments, it is essential to get your lender updated
   throughout. Lenders prefer to avoid repossessing your vehicle, so keep track
   of financial documents and communicate throughout.
 * Request loan modification. Modifying your loan to make your payment more
   affordable can help your lender avoid the expenses of repossession. You can
   defer a few payments or shift your term to fit your budget better. However,
   not all lenders allow this.
 * Work to pay off the loan. Catching up on payments may halt a repossession.
   This can be one of the most challenging approaches, but if there is room in
   your budget, it can dramatically help.
 * Sell the car. If the chance of affording your monthly payment is slim,
   selling your vehicle is another way to exit your loan. Ensure that you aren’t
   upside-down on your loan before choosing this route.
 * Consider refinancing. Changing your loan to get a better rate or term can
   lower your monthly payment to a better spot. But if you have missed many
   payments or are in default, it’s possible you won’t qualify for refinancing.
 * Surrender your car. You can choose to surrender your vehicle if you can no
   longer pay. This won’t be a repossession but will decrease your credit score.



SHARE:
 * Share this article on Facebook Facebook
 * Share this article on Twitter Twitter
 * Share this article on LinkedIn Linkedin
 * Share this article via email Email

Written by Rebecca BettertonArrow Right Writer, Auto Loans and Personal Loans
 * Connect with Rebecca Betterton on Twitter Twitter
 * Connect with Rebecca Betterton on LinkedIn Linkedin
 * Get in contact with Rebecca Betterton via Email Email

Read more from Rebecca
Rebecca Betterton is a writer for Bankrate who has been reporting on auto loans
since 2021. Through her writing, Rebecca aims to provide clarity and
accessibility to the automotive loans industry as the cost to finance new and
used vehicles continues to climb due to steep inflation.
Edited by
Pippin Wilbers
Edited by Pippin WilbersArrow Right Editor, Auto Loans
Pippin Wilbers is a Bankrate editor specializing in auto loans. Pippin is
passionate about demystifying complex topics, such as car financing, and helping
borrowers stay up-to-date in a changing and challenging borrower environment.
 * Connect with Pippin Wilbers on LinkedIn Linkedin
 * Get in contact with Pippin Wilbers via Email Email

Pippin Wilbers
Editor, Auto Loans


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