Auto loan defaults on the rise as lending and housing programs end

With inflation cutting Americans’ budgets, a growing percentage of people with auto loans are struggling to make their monthly payments.

TransUnion, which tracks more than 81 million auto loans in the United States, said Tuesday that the proportion of loans overdue by at least 60 days was 1.65% in the third quarter, the highest rate of 60-day delinquency in more than a decade.

“Consumers still want to stay informed as best they can. This inflationary environment only makes it difficult,” Satian Merchant, TransUnion’s senior vice president, told CNBC. “They leave less dollars in their pockets to pay off the car loan, because they have to pay more for eggs, milk and other things.”

The greatest impact was felt among unfit borrowers who had low credit scores and often had lower incomes.

In September, the average deal price for a new car was $47,138, up nearly $2,600 compared to the same period last year, according to auto research firm Edmunds. The average price paid for a used car was $30,566, an increase of nearly $2,500 from September 2021.

The rise in delinquencies follows the end of lending and housing programs set up during the pandemic. These programs are designed to help consumers who may have lost their jobs avoid getting a car back because they couldn’t make their monthly payment.

“There was this effect where the payment was late that may have occurred over the past few years or was delayed because this consumer did not have to make payments or their status was related to a residence,” the merchant said.

TransUnion said nearly 200,000 auto loans that previously benefited from accommodations in the pandemic era are now listed as 60 days overdue. The credit company said about 100,000 accounts more than 60 days overdue are still in residency programs.

Despite the rise in delinquencies, Merchant believes the auto loan market remains in good shape. The average interest rate for a new car loan rose to 5.2% in the third quarter, while the average rate for a used car loan was 9.7%, according to TransUnion. Both have risen by more than one percentage point compared to the same period last year.

These high interest rates are putting pressure on many consumers to extend the terms of their loans to at least seven years, Merchant said. However, delinquency rates have remained somewhat under control due to low unemployment.

“If we come to a position where Employment is starting to be a challenge in the US and unemployment is rising, which is when the industry really starts to worry about a consumer’s ability to pay off their auto loans.”

CNBC’s Megan Reader contributed to this report.