Despite rising auto prices, auto loan defaults remained surprisingly low in the first two years of the pandemic.
Unfortunately, this is no longer the case. As the Fed struggles to contain rising inflation and more borrowers default on their auto loans, we expect default rates to return to normal pre-pandemic levels in the coming months.
Why have auto loan default rates held steady?
New data after the Fed’s February meeting suggested that government support over the past two years has helped keep delinquencies stable. Since many Americans who received additional support during this period were also in the subprime category, that meant fewer loans.
Here’s how federal relief efforts affect self-criminal rates.
Missing loan originations
Generally speaking, most auto defaults come from borrowers with low credit scores. As a result, default rates have remained fairly low as fewer borrowers with poorer credit ratings are getting new loans. Many borrowers with lower credit ratings did not fund new loans because demand for vehicles with stay-at-home orders was lower and lenders introduced stricter acceptance criteria.
Results after the most recent Fed meeting support this hypothesis. For much of late 2020 and early 2021, the number of loans was low. These “missing origins,” as the Fed describes them, mean fewer delinquencies. When drivers who are prone to seizures or default on their loans don’t borrow, the arrears are reduced.
Combined with government support and lenders’ leniency on payments, it means there are fewer defaults and lending.
According to TransUnion’s annual forecast, there are expected to be about 28.9 million new vehicle start-ups — more than in the past three years. Due to this increase and lack of government support, delinquency is likely to increase.
Subprime borrowers fall
Experian data shows that subprime borrowers range from 501 to 600. Total loans to subprime borrowers fell to 17% in the third quarter of 2021, with deep subprime lending reaching a record low of 15.13%.
Defaults expected to rise in 2022
Strong credit trends during the pandemic are returning to normal, as the development of auto loans in January showed. Loans 60 days past due have risen steadily over the past eight months, up 2.9% year over year in January, according to Cox Automotive’s weekly insights in mid-February.
But normal doesn’t necessarily mean good. As these numbers show, delinquency rates are increasing every month — especially for subprime drivers.
Subprime borrowers are the ones most directly affected by inflation and are likely to be vulnerable to lenders. For now, it is important to pay the loan on time to avoid defaulting on the loan and the risk of losing the vehicle.
The good news is that these increased default rates have yet to lead to more motorists defaulting on their loans at pre-pandemic levels. But vehicle availability and access to credit could change the landscape for the year ahead in 2022.
Here’s how you can avoid falling behind on your car loan
The used car market is booming right now, and it’s a great option to save money. However, if you opt for a short-term loan, it is generally recommended that you pay a large down payment to avoid unmanageable monthly instalments.
You should also consider refinancing your loan if you find it difficult to make monthly payments. Keep in mind that extending the term will also increase the interest you pay over the life of the loan.
Buying a used car allows drivers to get a quality vehicle at a lower price. And since a new car can quickly depreciate in value in the first year or two, you’re more likely to avoid getting your loan into trouble — with more debt than it’s worth.
Resultado final
In the first two years of the pandemic, delinquency rates were low. The lower default rate is mainly due to fewer borrowers and more government support for borrowers who typically struggle to repay. As aid ends and more people look for vehicles — and thus financing — delinquencies are likely to increase steadily throughout 2022.
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