Why Are Auto Loan Delinquencies on the Rise?

October 5, 2023

Team ACV

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Why Are Auto Loan Delinquencies on the Rise?

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A used car in a dealer showroom

Between high inflation rates and rising interest rates in recent years, more and more Americans find themselves unable to make their auto loan payments. It’s clear that borrowers are hurting—and dealerships are, too. Understanding and addressing the rising rates of auto loan delinquency is crucial for any dealership in 2023. 

Behind the Increase in Auto Loan Delinquencies

According to Experian, both 30-day and 60-day auto loan delinquencies have risen in the last few years¹. A reported 1.89% of auto loans are in 30-day delinquency in 2023, and 0.76% of auto loans are in 60-day delinquency this year. While those numbers may not sound high on the surface, they’re worrying when compared to recent years. Auto loan delinquencies have risen past pre-COVID levels in 2023. But why?

Typically, loan defaults, including auto loan defaults, increase during periods of high unemployment. However, the United States is currently experiencing a relatively strong job market with an unemployment rate of 3.8% in August 2023, compared to over 5% unemployment two years ago².

Since the explanation does not lie predominantly with unemployment, it appears higher prices and rising loan rates are the primary drivers of increasing auto loan delinquencies. Higher prices and loan rates both squeeze customers’ budgets and make it more difficult for them to meet their loan payments. 

Why Are Delinquencies Higher Now Than During the Pandemic?

The rates of auto loan delinquencies are higher now than they were during the pandemic in 2021 and 2022. That may be surprising, especially since unemployment was higher during those years than it is now, but the explanation is straightforward. 

Auto loan interest rates have spiked significantly over the last few years. From August 2020 to August 2023, new car loan rates rose from 4.25%, on average, to 7.4%³. Rates for used car loans are even higher than new car rates. This increase in loan rates alone wouldn’t be enough to drive the rising loan delinquencies. When paired with higher vehicle prices, however, it’s no surprise more borrowers are struggling to meet their auto loan obligations. 

Borrowers who purchased vehicles last year when prices were highest may now find themselves with vehicles worth less than their remaining loan amounts. With higher interest rates, they won’t find a reprieve through refinancing either.

When the pause on student loan payments expired on September 1, 2023, some borrowers were likely faced with an even more significant strain on their budgets⁴. All these factors come together to contribute to higher delinquent car payments now than during the pandemic. 

How to Help Customers Avoid Loan Delinquency

Auto loan delinquencies aren’t just damaging for customers—they’re also detrimental to dealerships. When dealerships have increasing numbers of delinquent customers, they spend more on collections and take a hit to their profitability levels. Less than half of auto loan collections are ultimately successful, so it’s in a dealer’s best interest to help customers avoid loan delinquency when possible⁵. Here are some strategies for doing so.

Train Sales and Financing Teams on Subprime Lending

One of the most effective ways of reducing the number of loans that become delinquent is to be more selective when offering loans to customers. Dealerships generally provide their sales and financing teams with guidance on approving customers for loans, but dealers may need to adjust those guidelines in light of recent developments. During a period of higher loan delinquencies, dealerships should take more caution to avoid subprime lending. 

Subprime and deep subprime loans currently make up around 17% of total auto loans, which is down from 2021 and 2022¹. The majority of loans in delinquency are loans to borrowers with low credit scores—in other words, subprime loans⁶.

Even if you already advise your sales and financing teams to avoid issuing too many subprime loans, consider adjusting the lower credit score range that you will accept from borrowers. Any subprime loans are more risky than usual right now. You should provide your teams with training so they understand these increased risks and are better equipped to avoid issuing subprime loans for the time being. 

Acquire Affordable Inventory and Price Strategically

Another part of reducing loan delinquencies is adjusting your acquisitions and pricing strategies. Like any business, dealerships are always hoping to pick up inventory at the lowest possible prices to turn around and sell that inventory at the highest possible margins. In this environment of high delinquencies, though, it’s important to balance affordable inventory acquisitions with profitable pricing. 

Strategically pricing vehicles in a way that helps buyers focus on cars more likely to be within their means will help both customers and dealerships. Direct customers to cars within their price ranges whenever possible and resist the urge to price cars higher just because you can. Even as used car prices cool down from their peak last year, prices remain high for many prospective buyers. Striking a delicate balance between profitability and setting prices customers can afford is essential. 

ACV Auctions Is Here to Help

Managing all this data and the various factors that impact a dealership is a lot for any business. Having a reliable source of affordable, high-quality used vehicles can go a long way. Enter ACV Auctions. Get started with ACV Auctions today to see for yourself how the platform can help your dealership.  

 

Sources:

  1. Zabritski, M. (1 June 2023). State of the Automotive Finance Market Q1 2023. Experian. Retrieved September 20, 2023, from https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/2023/2023-q1-state-auto-finance-market.pdf?
  2. The Employment Situation - August 2023. Bureau of Labor Statistics. Retrieved September 20, 2023, from https://www.bls.gov/news.release/pdf/empsit.pdf 
  3. Interest rates on 60-month new car loans in the United States from February 2014 to August 2023. Statista. Retrieved September 20, 2023, from https://www.statista.com/statistics/290673/auto-loan-rates-usa/ 
  4. COVID-19 student loan forbearance (pause). USAGov. Retrieved September 20, 2023, from https://www.usa.gov/covid-student-loan-help
  5. Levant, J. How Auto Lenders Can Better Collect or Defer Customer Payments. Lightico. Retrieved September 20, 2023, from https://www.lightico.com/blog/auto-loan-collection-deferment-what-you-need-to-know/ 
  6. O’Brien, S. (4 February 2023). Auto loan delinquencies are rising. Here’s what to do if you’re struggling with payments. CNBC. Retrieved September 20, 2023, from https://www.cnbc.com/2023/02/04/auto-loan-delinquencies-rise-what-to-do-if-you-struggle-with-payments.html