The consumer credit landscape has significantly transformed, with auto loans shifting from a historically stable asset class to one now exhibiting considerable risk. Over the past fifteen years, delinquency rates on car loans have surged by over 50%, a trend directly attributable to escalating vehicle prices and a climbing interest rate environment. This dynamic is placing unprecedented strain on consumers across the economic spectrum, challenging the long-held notion that vehicle payment obligations were a priority over other financial commitments.
The Affordability Squeeze
VantageScore, a prominent credit scoring company, highlights that monthly car payments are now increasing at a pace exceeding that of mortgage payments in relative terms. Rikard Bandebo, Chief Economist at VantageScore, notes a dramatic rise in both the purchase price of vehicles and the associated costs of ownership, a trend that has accelerated notably in the last five years. Research from Cox Automotive indicates that new car prices have climbed by more than 25% since 2019, pushing the average above $50,000. Further exacerbating this issue, automotive research firm Edmunds.com reports that the average new car monthly payment reached $767 in the third quarter, with one in five borrowers exceeding $1,000 per month. Coupled with interest rates on new car loans now surpassing 9%, this creates a severe automotive affordability crisis.
A Double Whammy for Borrowers
The escalating cost of vehicles, combined with higher financing expenses, represents a significant financial burden for consumers. This challenge is not confined to any single income bracket. In fact, the VantageScore study reveals that prime and near-prime borrowers, typically possessing strong credit histories, are now defaulting on car payments at a faster rate than subprime consumers. This counterintuitive trend emerged after lenders tightened financing criteria for the lowest-tier borrowers approximately three years ago. Bandebo observes that individuals with higher incomes often aspire to own more expensive vehicles, inadvertently exposing them to greater financial exposure.
Longer Loans, Higher Balances
The average auto loan balance has expanded by 57% since 2010, a growth rate that outpaces all other consumer credit products, according to VantageScore data. To manage the monthly financial outlay, consumers are increasingly extending loan terms to seven years or more. This practice leaves a growing number of individuals in an “upside-down” position, where they owe more on their vehicle than its current market value. This trend is likely to persist, driven by consumer preferences for larger vehicles such as trucks and sport-utility vehicles, coupled with a reduction in the availability of more affordable models from automakers.
Jonathan Reed received his MA in Journalism from Columbia University and has reported on corporate governance and leadership for major business magazines. His coverage focuses on executive decision-making, startup innovation, and the evolving role of technology in driving business growth.