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Business Growth Economy

The Devil In Delinquencies

Experian’s Q3 State of the Automotive Finance Market Report revealed that 60-day auto loan delinquencies rose past pre-COVID levels, prompting concern for the auto lending industry. According to Fitch ratings, a record number of subprime borrowers are behind on auto loan payments by more than 60 days, hitting 6.11% in September. Vehicle repossession rates are also on the rise, leaving many without transportation. High delinquency and default rates mean lenders could face significant losses as they have more difficulty recouping funds.  

Another interesting data point is the scale of student loan debt compared to auto loan debt. In the first quarter of 2023, more than 43 million people in the U.S. were holding federal and private student loan debt, totaling more than $1.77 trillion overall. However, in September, the Wall Street Journal reported that the total amount of auto loan debt had surpassed student loan debt. At the end of Q2 2023, auto loan debt reached $1.58 trillion compared to $1.57 trillion in student loan debt.

Much of the loan debt can be attributed to the rise in car payments. According to Edmunds, the average new car payment in Q3 2023 reached $736 per month – a 4.6% increase over a year earlier.  Experian reports that three times as many people paid more than $1,000 monthly toward an auto loan. Think about how this trend line correlates with the rise in delinquencies.

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Business Growth

Move Past Second Thoughts

Rising interest rates and inflated vehicle prices are giving consumers second thoughts on purchasing a vehicle. A recent McKinsey & Company survey revealed that 77 percent of respondents indicated that reduced purchasing power is causing them to either postpone large expenses or be more conscious about spending, impacting car purchases. Nearly 40 percent of respondents who had intended to buy a vehicle are postponing that purchase, while a quarter plan instead to purchase a more affordable car type, citing high car prices, lack of affordability, and high interest rates for financing as reasons for their decision.

The question of financing is top of mind for consumers, according to the McKinsey survey. About 80 percent of buyers in the United States chose to finance, while about 20 percent chose to purchase outright. According to Experian and StoneEagleMETRICs, cash deals have been on the rise since the fourth quarter of 2020, with a steep rise in 2022.

While consumer interest in financing reflects growing affordability concerns, consumers also are unwilling to sacrifice certain features. Between 30 and 50 percent of respondents claimed they are very likely to prioritize vehicle size, premium brands, or higher trim when purchasing a new vehicle. The balance of consumers is likely willing to compromise, given reduced purchasing power.

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Business Growth

Keep Your Eye on the Target

Credit unions have had a positive start to November, with good news on several fronts.

  • The Federal Reserve kept interest rates on hold for a second consecutive meeting, taking a cautious stance at a time when rapid inflation is retreating but has not reached the target goal of 2 percent.
  • Consumer spending ticked up to 7 percent in September from 4 percent in August, reflecting a relatively positive sentiment.
  • The Bureau of Labor Statistics reported that the U.S. economy added 150,000 jobs and the unemployment rate rose a tenth of a percentage point to 3.9 in October, positive news in the eyes of economists.
  • It also appears the union strike against the automakers has ended, pending contract ratification.

However, auto lending rates remain sky high with the average auto loan interest rates across all credit profiles ranging from 5.07 percent to 14.18 percent for new cars and 7.09 percent to 21.38 percent for used cars, pricing many would-be buyers out of the market. While total new-light-vehicle sales were up 1.6 percent in October from a year ago, the MSRP of those vehicles remained high and the average incentive spend from manufacturers declined 1.4 percent to $2,322, according to Motor Intelligence data.

Additionally, the Big 3 automakers have signaled that the costs accrued to come to an agreement with the United Auto Workers Union will be passed on to consumers, i.e., higher prices. Wards Intelligence estimates that the roughly 6-week long union strike resulted in 35,000 lost deliveries in October and November sales will continue to see some lingering effects. Used vehicle inventories remain challenging as dealers resist inflated auction prices and consumers continue to hold on to their vehicles. With all of this in flux, credit unions must keep their eye on the target for the remainder of the year.

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