Why Americans are falling behind on car loans?
The latest data from Fitch Ratings shows that 6.1% of subprime borrowers were at least 60 days past due on their car payments -- the highest percentage since 1994. Two factors are causing an increase in late car payments: the rapid rise of car prices over the past few years and high interest rates.
Automakers continue to produce higher-priced vehicles instead of affordable ones, but the big reason that car owners are falling behind on their payments is rising interest rates. The percentage of car owners that pay at least $1,000 jumped to 17.1% in the second quarter of 2023, per Edmunds.
Merchant notes that auto loan delinquencies now are close to the highest levels seen in the Great Recession, but they aren't necessarily alarming because delinquency rates are coming off extraordinarily low levels since the pandemic.
Recent data from Fitch Ratings found that 6.1% of subprime borrowers were delinquent, or at least 60 days past due, on their auto loan as of September — the highest share recorded by the credit rating agency since it first started tracking the figure in 1994.
After enjoying a strong rebound in sales in 2023, the auto industry appears headed for slower growth this year as consumers struggle with elevated interest rates and high prices for new cars and light trucks. Edmunds, a market researcher, expects the industry to sell 15.7 million vehicles this year.
The average car loses about 25% of its value in its 1st year, and nearly 50% of its value in the first 3 years. So that $30K car is worth about $15K three years later. Now, different cars depreciate at different rates, but the point is borrowing money for a depreciating asset is almost always a bad deal.
Following recent increases in used vehicle loan rates, only households earning in the top 40% can afford the average used car, according to a new report from car ownership app Jerry, which describes an “affordability crisis that runs wide and deep.”
If you're anywhere from 30-90 days late, your car could get repossessed. The Federal Reserve Board says almost 8 million Americans are three months behind on their auto loans, and that should be a warning sign for working class consumers and those with a low income, especially if you're in the 25-35 age bracket.
Lenders often sell loans as a way to pay off creditors when they go out of business. If your car loan is sold to another lender, your new lender will most likely have you pick up your payments where you left off and continue doing business with you according to your contract.
Car payment statistics
The average monthly car payment for new cars is $726. The average monthly car payment for used cars is $533. 39.20 percent of vehicles financed in the third quarter of 2023 were new vehicles. 60.80 percent of vehicles financed in the third quarter of 2023 were used vehicles.
What is the average car payment in the US?
The average monthly car loan payment in the U.S. is $738 for new vehicles and $532 for used ones originated in the fourth quarter of 2023, according to credit reporting agency Experian.
In today's market of inflated car prices and payments, the average monthly new-car payment has surpassed $700, according to the vehicle affordability index provided by analytics companies Cox Automotive and Moody's Analytics.
According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense! Make sure to consider fuel and maintenance expenses. Make sure your car payment does not exceed 15%-20% of your total income.
Based on this criterion, 60 percent of households and 82 percent of individuals in the U.S. are currently unable to afford a new car. One contributing factor to this affordability challenge is the preference of Americans for pricier crossovers, pickups, and SUVs.
New inventory is expected to reach pre-pandemic norms in 2024, with almost 3 million units available, or three times the amount during the chip shortage. Days' supply will stay healthy. New-vehicle transaction prices are expected to decline moderately.
The automotive supply chain will likely never look like it did pre-pandemic, but inventory levels generally recovered in 2023 and are expected to continue doing so in 2024 and 2025. Car prices remain elevated in 2024 due to inflation but are showing initial signs of decreasing as inventory stabilizes.
We almost forgot what that feels like, but our data show 2024 could shape up to be a buyer's market provided you're looking to buy new. New-car inventory increased by 36% year over year, with inventory levels close to what they were in February 2021 before pandemic shortages really started to hit.
Millionaires Avoid Car Payments
And more importantly, 8 out of 10 millionaires buy their cars with cash and don't have a car payment to worry about. In fact, research done by Ramsey Solutions found that non-millionaires are twice as likely as millionaires to have outstanding car loans.
Ideally, you don't want to spend a week or more of your pay each month on a car note. A good ballpark range is that you should aim to spend no more than 15% to 20% of your income on all transportation costs — and that includes insurance, parking, maintenance, gas to put in the tank, and monthly payments.
How much should you spend on a car? Whether you're taking out an auto loan or a personal loan to pay for your car, it's a good idea to limit your car payments to between 10% and 15% of your take-home pay. If you take home $4,000 per month, you'd want your car payment to be no more than $400 to $600.
What is the 20 3 8 rule?
The 20/3/8 rule stand for:
20% down. Finance no longer than 3 years. Total car payment is no more than 8% of gross income.
The 17.5 percent of the third quarter is up by 0.4 percent versus Q2. Then add in that many families own more than one car and that becomes a huge financial burden. So, according to one report, that means that you need to make at least $100,000 per year to afford any new car payment.
Half of Americans purchased their most recent car through financing. Across all respondents, 1 out of 2 purchased their most recent vehicle through an auto loan. Auto loans are the third largest consumer credit market in the United States, and Americans currently have a total of $1.4 trillion in outstanding auto debt.
If your lender can't locate your vehicle to do a "self-help" repossession, they can still sue you for the vehicle. This will involve a small claims case, where the judge will order you to give the car to the lender. You might even be compelled to Court to provide testimony about the location of the vehicle.
- Pay off the car. The best way to get rid of a car loan is to pay off the balance of the loan. ...
- Refinance your loan. ...
- Sell the car. ...
- Renegotiate the terms of your loan. ...
- Trade in the car. ...
- Voluntary repossession. ...
- Default on the loan.
