There's no denying that cars, whether brand new or pre-owned, are pricier than ever. As a result, auto loans are accumulating more debt. A recent report from Financial Times provides a stark insight into just how significant this debt has become. Among major household expenses, car loans rank second only to mortgages, accounting for nine percent of all debt. They surpassed student loans in the second quarter of this year and are not far behind mortgages, which have seen a slight decline in recent months. Additionally, people are finding it increasingly difficult to keep up with these substantial payments, as delinquencies are on the rise. By July, delinquencies were approaching record-high levels last seen during the 2009 global financial crisis.
Adding to the woes, buyers who splurged during the COVID pandemic and the subsequent supply chain shortage—when new vehicles were scarce and used car prices soared—are now grappling with negative equity as vehicle values decline. Many of these buyers now owe significantly more than their cars are worth, which poses a risk to lenders in the event of repossession. The bank may not recover as much cash from a sale, negatively impacting loans and interest rates. This burden is then passed on to consumers, perpetuating the cycle until the bubble bursts, as it did 15 years ago.
On a slightly positive note, the report indicates fewer repossessions for households with prime loans compared to the pre-Great Recession era in 2009. In other words, individuals with better credit are falling behind on payments but are making efforts to catch up. In contrast, during that period, they would simply abandon their $60,000 SUVs.
It's also noteworthy that mortgages constituted a much larger portion of household debt in 2009, far exceeding all other forms of debt. Buyers were willing to sacrifice their expensive cars to try and hold onto their even more costly homes.
According to Cox Automotive, the average price of a new car now stands at $47,870. While this is slightly lower than the peak in 2022, total automotive debt remains around $1.6 trillion as of last September.
