Why Did the US Start Having Problems With Payments on Car Loans
A crisis is brewing in the American car loan market: car owners cannot cope with servicing their obligations, and banks cannot compensate for their losses, even by seizing cars.
The increase in the key rate in the US has now hit car owners who bought cars on credit. Interest rates on loans have risen, and inflation has significantly reduced the purchasing power of consumers. As a result, payment discipline among borrowers has shaken in the United States.
But the problem lies not only in unscrupulous car owners. Car prices also began to decline, and this led to a new round of problems. Now it is more profitable for many debtors to stop paying on the loan and agree to the bank taking the car as collateral, and to buy another one, cheaper. Bankers do not agree with this state of affairs - it is unprofitable for them.
While there is no solution to the problem, the number of bad debts in the US market is growing at an accelerated pace, and the demand for cars is falling both in the primary and secondary sales markets.
Delays
TransUnion, which has disbursed more than 81 million auto loans in the US, said its share of loans 60 days past due reached 1.43% in the third quarter of the year, its highest in a decade. More than 30 days of delay is listed for 3.34% of car loans.
The only reason for this is inflation, which has eaten up a share of real incomes of the population, the credit organization is sure. The situation has especially strongly affected the mass borrower, who usually has a low credit rating and low income.
The increase in delinquencies coincided with the end of the loan holiday program launched during the pandemic. It allowed motorists who bought a car on credit not to be left without a vehicle for a time when they might have difficulty making payments. However, in reality, it turned out that with the end of the pandemic, the financial problems of those who survived it did not go away, so the moment of personal default by American car owners was only delayed. Some 200,000 auto loans covered by the program during the pandemic are now 60 days past due, according to TransUnion.
Interest rates are rising
The average interest rate on a loan for a new car rose in the third quarter to 5.2%, and for a used one to 9.7%, writes CNBC. High interest rates are forcing consumers to stretch loan repayment periods up to seven years.
The interest rate on loans varies greatly depending on the credit history of the borrower. Low-income citizens in the United States are often heavily indebted, and their payment discipline leaves much to be desired. In October, for a borrower with a credit score below 580, the average rate on a loan for a new car reached 18.2%, and for a used car it reached 21.8% in October, according to Cox Automotive.
The reasons for the rise in auto loan rates, in particular, the increase in the key rate in the United States, which has increased by a total of 375 basis points this year, is an increase not seen in the country since 1981.
Market Watch has calculated how much the budget car loan will cost not the richest American family. The cheapest new car in the US in 2022 is the Chevrolet Spark. With a 10% down payment, the monthly payment for it will be $400. Thus, a family with a total annual income of $50,000 will have to pay 10% of their total income for a car.
Cars are getting cheaper
Prices for new cars in the US have been rising at an accelerated pace until recently. According to Kelley Blue Book, in August the average price of a new car was $48.3 thousand, with an increase of 0.5% ($222) compared to July and 10.8% ($4.7 thousand) by August 2021.
The median price of a new car in September was $47,100, still $2,600 more than a year earlier, CNBC reports , citing research firm Edmunds. The average price of a used car reached $30.56 thousand, plus $2.5 thousand compared to the price of September 2021.
As for the secondary market, it turned out to be more sensitive to the problems of buyers: prices for used cars fell by 7% in the third quarter, writes Bloomberg citing Manheim. Analysts fear that if customers begin to notice that they owe more for their cars than they are worth, they will stop paying en masse and wait for their cars to be seized by banks - then they will simply buy new ones at a better price.
Banks in danger
Major U.S. banks are warning of upcoming difficulties in car loans as falling prices for used cars threaten to leave borrowers with deals made above the current market price, writes Bloomberg. Wells Fargo & Co., for example, announced that loans issued at the end of last year have the highest loss rate.
Representatives of Ally Financial Inc., the second-largest auto lender in the US, said that the number of uncollectible debts on auto loans in the third quarter increased to 1.05%, and is forecast to rise to 1.6% in 2023. However, this is below pre-pandemic levels. Demand for new car loans is also not falling. Ally CEO Jeffrey Brown says the company is doing well so far with sales of new loan products.
Meanwhile, Wells Fargo was the first to notice a decline in demand for auto loans. The volume of newly issued products in the third quarter fell by 40% compared with the results a year earlier. The reasons for this process are combined - on the one hand, an unfavorable credit situation, on the other, a disruption in supply chains.
Seized cars
In case of delay on a car loan, the purchased car is returned to the bank, and this, as a rule, is not the scenario that suits the credit institution. In the two years since the pandemic began, the number of car seizures from late owners with high credit ratings has increased by an average of 2-4%. Among borrowers less trusted by banks, this indicator increased by 11% compared to 2020.
At the same time, banks often cannot sell seized cars. The media note that technically defective cars enter the secondary market. Knowing that they will have to part with the car, the last owners usually stop caring for it and return it in such a state that it becomes difficult to resell the car. As a result, banks are trying to make sure that lenders keep their vehicles with them and at least somehow pay off the loan taken on it.
The situation looks threatening for banks, but Satyan Merchant, senior vice president of TransUnion , believes that despite the difficulties, the auto loan market remains healthy at this stage. According to him, as long as unemployment remains low in the country, the situation with delays in payments remains under control.