Rising auto loan delinquencies reflect the K-shaped economy

We’ve been starting to see signs that some consumers are having trouble paying off their debt.

Household delinquency rates are higher than they were last year and the year before, according to the New York Federal Reserve. Meanwhile, the number of auto loans that are more than three months overdue is at a level we haven’t seen since the aftermath of the 2008 financial crisis.

Payments on auto loans have been coming in later and later at La Salle State Bank in Illinois.

“I’d say maybe 8-12 months ago, we started to say people pushing that 30 days, maybe 35 days,” said Chris Duncan, the bank’s chief lending officer. “And now, we’re starting to see that 35 days turn into 45 days.”

Duncan said he pays close attention to these late payments. People tend to prioritize their auto loans, since they need their cars to go to work. So if they’re late on their car payments, that’s a sign of a bigger issue.

“At that point, you’re probably maxed out on your credit cards, your savings has dwindled down, you probably don’t have much of a cushion there,” Duncan said.

He said that boils down to the higher cost of living — and not just for groceries and gasoline.

Jeremy Robb, chief economist at Cox Automotive, said vehicle prices have been rising, too.

“New vehicle prices are close to $50,000,” Robb said. “Used vehicle prices are about $27,000. Those are both up about 41% since the pandemic.”

Robb said that’s pushed up monthly auto payments. The average payment for a new car is now $765 a month, according to Experian.

“And on the used side, you’ve kind of seen the same thing,” Robb said. “The average used car payment now is at about $600. And before the pandemic, that used to be $300 or $350.”

And if your credit history isn’t great, those payments could be a lot higher. Matt Schulz, chief consumer finance analyst with LendingTree, said your credit score determines the rate you pay on your car loan.

“If you have excellent credit, you may get a rate of about 7.5% on a new car loan, whereas if you have poor credit, that may be up in the 20s,” Schulz said.

Consumers with lower incomes have the hardest time paying back their auto loans. Anne Villamil, an economics professor at the University of Iowa, said they’re less able to bear the rising costs of vehicles, maintenance, insurance and gasoline.

And since drivers can’t just cut out those costs, they cut back elsewhere.

“Maybe you don’t go out to dinner, maybe you pack your own lunch, maybe you don’t go to a movie,” Villamil said.

Rising auto loan delinquencies aren’t likely to have a big impact on consumer spending overall, said Grace Zwemmer, an economist with Oxford Economics.

“Not to say we won’t see some slowdown in spending moving forward, but it’ll be tenths of a percentage point,” Zwemmer said.

Instead, Zwemmer said rising auto loan delinquencies are yet more evidence of the K-shaped economy.

“It might be pointing to further evidence of consumer bifurcation, where those that are already struggling to make their payments are finding it increasingly difficult to bring down their outstanding balances,” she said.

Meanwhile, people who are able to make their payments will keep on spending.