Interest Rate Sticker Shock Drives Record Auto Loan Delinquencies

Since 2010, auto loans have gone from being the safest credit products to the riskiest.

VantageScore Chief Economist Rikard Bandebo discussed the country’s record-high auto delinquency rates in an interview with Bloomberg Monday (Dec. 22).

Several factors lead to this trend, including the fact that the price of a car “has gone up an incredible amount,” he said. In addition, consumers are often “caught off guard” by the fact that interest rates are higher, as are the costs of keeping a vehicle insured and repaired. These are all things consumers may not consider as they see the sticker price of a car at the dealership and think they can afford it.

“So, when all of those things hit them, they can be in a situation where we just can’t make it work,” Bandebo said.

Additionally, the effects of an auto loan default are more immediate than defaulting on a mortgage payment, and with significant consequences, given how reliant people are on their cars.

“People don’t willingly just default on these auto loans,” Bandebo told the hosts of Bloomberg’s Odd Lots podcast. “And so, I think it is a sign that correlates with the fact that more households are struggling to make ends meet.”

PYMNTS Intelligence data showed that 34% of consumers who live paycheck to paycheck and struggle to pay their bills have had to spend more than usual in the past six months, which in turn has eaten into their savings.

The cost of food has been a critical stressor cited by 56% of consumers interviewed by PYMNTS Intelligence. Additionally, 55% of consumers said the same about inflation, and 23% said rising costs are their greatest source of financial stress.

Additional research found that these financial pressures affect different generations in different ways.

According to the PYMNTS Intelligence report “Economic Pressures Split the Generations as Each Rethinks the Basics,” half of all consumers said they are struggling to stay on top of their daily living expenses.

“Yet the nature of these difficulties varies,” PYMNTS wrote last week. “Many older Americans on fixed incomes are more likely to be squeezed by the rising cost of essentials, such as groceries and utilities, while younger adults are juggling unstable income, transportation costs and mounting credit card balances.”