Car Loan Delinquencies Are Skyrocketing With More Borrowers Upside Down On Their Autos

Car Loan Delinquencies Are Skyrocketing With More Borrowers Upside Down On Their Autos

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A surge in negative equity — owing more than your car is worth — is alarming consumers and rattling the auto industry as the Federal Reserve continues raising interest rates and more people show up at car lots $10,000 upside down on their car loan trade-ins.

Consumers with low credit scores are falling behind on their auto loans at record rates.

Payments that are at least 60 days late on subprime auto loans — those with high interest rates typically made to people with low credit scores — rose to more than 6 percent in December, which was a record, according to data from S&P Global.

A reputation for predatory lending is not confined to the subprime mortgage industry, which was blamed for the Great Recession of 2008-2009. Auto finance also tends to have a higher incidence of practices perceived as predatory, involving the approval of expensive or heavy-fee loans that lenders know customers may not be able to repay.

Delinquent payments are the first step toward default and auto repossession, Axios reported.

Although negative equity is not unusual among auto loan seekers, some dealers say people are buying at sky-high prices and rolling debt from one car to another one or two, with loans often stretching to seven years, according to Bloomberg.

The annual inflation rate for the U.S. is 6.4 percent for the 12 months ending January 2023. The cost of new cars has risen 20 percent since the start of the pandemic, and used cars are up 37 percent. Among other transportation categories, airfares are up 25.6 percent; auto repairs are up 23.1 percent; all public transportation is up 17.1 percent; and car insurance is up 14.7 percent.

The growing availability of new cars, along with a reduction in supply chain bottlenecks, is driving down prices on used cars, according to a new report.

“As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,” said Ivan Drury, director of insights at auto-market researcher Edmunds. “Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise.”

Used car prices spiked during the pandemic, raising the level of borrowing, especially among people with low credit scores who mainly buy used cars, according to an analysis by the Consumer Financial Protection Bureau (CFPB).

Now, those higher borrowing costs are getting harder to manage.

In January, the Consumer Financial Protection Burea and the New York Attorney General sued one of the largest subprime auto lenders, Credit Acceptance Corp (CAC), accusing it of making “predatory loans to millions of financially vulnerable consumers,” by charging “exorbitant” interest rates and expensive add-on products. This resulted in “debts that even CAC believes the borrowers often cannot afford to repay.”