The rise in US auto debt is worrying, and the surge in auto loan delinquencies is cause for concern. Factors such as high monthly payments, negative equity, extended loan terms, and fluctuation in used-car values have all contributed to this problem. Consumers, lenders, and automakers must work together to find solutions that ensure the stability of the auto industry while protecting consumers from falling into a debt trap.
The auto loan debt in the United States has doubled in just one decade, going from $750M in 2012 to a staggering $1.5T in 2022. This increase is alarming, especially when coupled with the rise in auto loan delinquencies, which hit the highest level in a decade. According to TransUnion, the percentage of loans that are at least 60 days delinquent hit 1.65% in the third quarter of 2022, 26.7% higher than the previous year. In this article, we will delve deeper into this issue and explore the reasons behind the surge in auto loan debt and delinquencies.
$1,000 Monthly Payments
The share of buyers who took on monthly payments of $1,000 or more increased to 15.7% in the US. This trend indicates that for the typical American, a new car is increasingly out of reach. Many have no choice but to make these high payments as they need a car to commute, drop off children at school, and buy groceries. The cost of new vehicles has risen by 20% since the start of the pandemic, and used vehicles are still up 37% even after cooling in the fall.
Negative Equity and Extended Loan Terms
The rise in prices and prevalence of 84-month loans are fueling concern among consumer advocates and within the auto industry. For trade-ins that carry negative equity, the average amount is approaching prepandemic levels at $5,500, according to Edmunds data. The surge in prices and prevalence of 84-month loans are fueling concern among consumer advocates and within the auto industry. To respond to higher vehicle costs, lenders have kept extending the length of auto loans. This trend is worrying, especially if lenders continue to offer these loans to borrowers with lower credit scores.
Fluctuation in Used-Car Values
One wild card for consumers is the fluctuation in used-car values. After a historic climb during the pandemic, values fell 13% from their peaks as of January but suddenly climbed again in February. If they fall further, anyone who bought at the top of the market will fall further into the trap of negative equity. Subprime consumers coming in with negative equity and looking to buy another car are particularly vulnerable.
Jerome Powell’s Views on Auto Loan Delinquencies
On 60 Minutes, Jerome Powell dismissed surging auto loan delinquencies by saying they merely reflect that not everyone is benefiting from the widespread prosperity the US is currently enjoying. This statement is not reassuring, especially considering that even if the US economy avoids a recession this year, consumers will likely struggle to make payments on their auto loans, especially with the Federal Reserve planning to keep raising interest rates.
Auto Industry Profits
The average new-car interest rate rose to 6.9% in January from 4.3% a year earlier, according to Edmunds. With car prices still elevated, demand high and inventory levels relatively low, Ford Motor Co., General Motors Co., and other automakers continue to rake in sizable profits.
Manheim Used Vehicle Value Index
January 2023, data from the Manheim Used Vehicle Value Index shows a significant decline in used vehicle prices in the United States. According to the index, prices were down 14.9% from the same time a year ago, marking the largest annualized decline in the index’s history.
Additionally, the non-adjusted price change in December showed a decline of 1.9% compared to November, indicating that the downward trend in prices is continuing. This trend is likely due to a variety of factors, including the ongoing supply chain issues affecting the automotive industry, which have caused shortages of new vehicles and increased demand for used ones.
The Manheim Used Vehicle Value Index is a tool used to measure changes in wholesale used vehicle prices in the United States. Manheim is one of the largest wholesale auto auctions in the world, and the index provides a snapshot of the used vehicle market in the country. The index was first introduced in 1995 and is now widely recognized as a key barometer for the health of the used car industry.
The index tracks millions of transactions each month and is based on the prices of vehicles sold at wholesale auctions. It takes into account variables such as age, mileage, make and model, and seasonality, and provides a monthly value that is used by dealerships, lenders, and other industry professionals to make informed decisions about buying and selling used vehicles.
The Manheim Used Vehicle Value Index is widely used as an industry benchmark, and it is often cited in media reports about the state of the used car market in the United States. It is also used by economists and policy makers as an indicator of consumer sentiment and economic health, as used car sales are often a leading indicator of economic activity.
In recent years, the index has gained greater prominence due to the growing importance of the used car market in the United States. With the cost of new vehicles rising rapidly and more consumers turning to used vehicles as a more affordable alternative, the Manheim Used Vehicle Value Index has become an increasingly important tool for understanding the dynamics of the used car market.
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