Consumer auto delinquencies: Warning sign for consumer health?

Outside of major urban areas, most people need a car or light truck to get to work, take their children to and from schools, and maintain general mobility. Virtually every job application asks, “Do you have access to reliable transportation?” Losing access to a vehicle is a major disruption.

The CFA totals rising total auto debt at a staggering $1.66 trillion, along with increasing repossessions and a sharp increase in delinquencies.

Repossession rates have reached their highest level since 2009, with 1.73 million vehicles repossessed in 2024. A particularly alarming trend is delinquencies are rising among borrowers with above-average credit scores.

Auto loan delinquencies are now above pre-pandemic levels and are at level experienced before the financial crisis.

Meanwhile, the number of subprime auto loans is rising. Subprime auto loans are those extended to borrowers with credit scores below 620. These loans carry higher interest rates, require larger down payments, and typically include repossession clauses that are triggered much more quickly than those of conventional auto loans.

The CFA reported that 6% of subprime loans are now 60 days delinquent, suggesting that repos among below-average credit borrowers may soon spike.

The perfect storm for auto credit problems

It is becoming increasingly expensive for the average American to maintain this necessity of basic transportation.

New autos and light trucks are more costly than ever, with the average price of a new vehicle approaching $50,000, while the average used vehicles is nearing $25,500. The latter more difficult to finance, often requiring higher down payments and carrying higher interest rates.

Car companies and lenders have recognized these pressures and have been extending loan terms. Two decades ago, most buyers would have been taking out three- to four-year car loans. Today, loans extending up to 10 years are common, as lenders stretch amortization schedules to keep monthly payments manageable.

Of course, the trade-off is that total interest costs are significantly higher.

Compounding the financial burden of ownership, the costs of insurance and fuel are steadily rising.

Indirectly, higher interest rates are also making conditions more difficult for auto borrowers. Although most auto loans are issued with fixed rates, consumers with home mortgages are often locked into variable-rate terms. Since the pandemic, those rates and the cost of servicing mortgages, have been climbing steadily. When faced with a choice between their home or their vehicle, consumers tend to prioritize keeping their home.

Why this matters

This credit crunch underpins why so many eyes are on the Federal Reserve’s interest rates. Reduced rates could ease the financing burden on consumers for both home mortgages and auto loans.

However, a key issue remains: The banks’ margin targets.

Even if the Fed lowers rates for the banking system, that discount may not full reach consumers. Banks may continue to widen credit spreads on new loans, particularly for borrowers with lower credit scores.

As consumers struggle to service their debt, something has to give, and that is likely discretionary spending. Housing, food, and transportation will take priority, leaving less room in budgets for non-durable goods.

We need to pay close attention to retail spending from now through the holiday season.

Most retailers only report quarterly sales figures, not monthly data, meaning third-quarter figures has not yet been released, and may not immediately reflect the correlation between auto delinquencies and consumer spending.

The U.S. Census Bureau and the National Retail Federation (NRF) track monthly retail sales, which provide a more timely indicator of these emerging pressures.

Census Bureau data show August retail sales rose 0.6% month over month and 5% year over year. Online sales were particularly strong, up 10.1% year over year, while food service and drinking places (their term!) increased 6.5% over the same period.

If household budgets continue tightening, spending on food and beverage services is likely to soften first. That will be an important trend to monitor going forward, along with holiday e-commerce performance through Christmas, which will provide a clear view of consumer resilience heading into year-end.