Car repossessions are on the rise as a warning sign for the economy

WASHINGTON — A growing number of consumers are falling behind on their car payments, a trend that financial analysts fear will continue, in a sign of the stress rising car prices and inflation they are taking on household budgets.

The foreclosures collapsed at the start of the pandemic as Americans got a boost from stimulus checks and lenders were more willing to accommodate those who were behind on their payments. But in recent months, the number of people behind on their car payments has approached pre-pandemic levels, and for lower-income consumers, the loan default rate is now higher than it was in 2019. , according to data from the Fitch rating agency.

Industry analysts worry the trend will only continue through 2023, as economists expect unemployment to rise, inflation to stay relatively high and household savings to decline. At the same time, a growing number of consumers have to stretch their budgets to buy a vehicle; The median monthly payment for a new car increased 26% from 2019 to $718 a month, and nearly one in six new car buyers spend more than $1,000 a month on vehicles. Other costs associated with owning a car have also skyrocketed, including insurance, gas and repairs.

“These repossessions are happening to people who could afford that $500 or $600 monthly payment two years ago, but now everything else in their life is more expensive,” said Ivan Drury, chief information officer for the car buying website Edmunds. “That’s where we’re starting to see recoveries happen because everything else starts to tie you up.”

‘Recipe for disaster’

For those in the recovery business, it has been difficult to keep up. Jeremy Cross, president of International Recovery Systems in Pennsylvania, said he can’t find enough repos to meet demand or the space to store all the cars his company has commissioned to recover. With the holidays coming up, he’s been particularly busy as people prioritize spending elsewhere, and he expects business to continue through the next year and into 2024.

“Right now, it’s really the perfect storm,” Cross said. “For the last two years, car prices have been inflated because there was no supply of new cars, people kept buying like crazy because they had a lot of cash to stay at home, they had inflated credit scores, so it was like a recipe. for disaster.”

At the same time, the number of recovery companies has dropped by 30%, as many companies closed and workers found jobs in other industries when recoveries dipped during 2020, Cross said. Now, he said, lenders are paying her premiums to repossess their cars first in anticipation of a continued rise in loan delinquencies.

“Volume is increasing and the remaining companies that are still doing embargoes are very busy,” Cross said. “The overall numbers are not pre-pandemic numbers yet, but we will see a big shift in 2023 and 24 that I think lenders are starting to recognize because they are offering financial incentives that they never had to in the past. They are competing for position knowing that there is only a certain amount of bandwidth available.”

It’s an issue that worries officials at the Consumer Financial Protection Bureau, who say they’re watching worrisome signs in the auto market, particularly among so-called subprime borrowers, who have below-average credit scores, and those with loans taken in 2021 and 2022 when car prices were particularly high.

“The loans obtained in those years are doing worse than in previous years just because those consumers had to finance cars once supply chains got bogged down and prices started to rise,” he said. Ryan Kelly, interim manager of the CFPB’s auto finance program. “Those consumers were hit by inflation twice. First, when they had to finance a car after prices went up, and then when they had to put gas in the car after the conflict between Russia and Ukraine started. So there’s a lot of consumer stress.”

If the economy deteriorates as many economists predict in 2023, the number of people behind on their car payments should continue to rise, even as consumers tend to prioritize car payments over most bills. due to the importance of a car in getting to work or potentially providing shelter, industry analysts said.

Still, the rate of defaults and foreclosures is not expected to reach the levels of 2008 and 2009, when there was a spike caused by the financial crisis. The percentage of auto loans that were 30 days past due was 2.2% in the third quarter compared to 2.35% past due in the same period of 2019, according to data from Experian. By contrast, just over 4% of auto loans defaulted in 2009.

“We expect it to continue to rise and perhaps even exceed pre-pandemic levels due to macroeconomic headwinds from higher interest rates, higher borrowing costs and expectations that unemployment will continue to rise,” said Margaret Rowe, lead auto analyst at Fitch. . “I think our expectation is that we’re going to continue to see it go up, but it’s been so low that even going up isn’t like what we saw in the Great Financial Crisis.”

‘A lot of stress’

Cox Automotive analysts forecast that while loan defaults and recoveries will rise from their pandemic lows, over the long term through 2025 they predict overall defaults and recoveries to remain at or below historical norms.

Still, the financial squeeze has been particularly difficult for low-income consumers looking for affordable vehicles, which have been particularly difficult to find. Whereas in the past, those car buyers would have bought a used car for $7,000 to $15,000, now they have to spend $20,000 to $25,000 for the same type of vehicle. Among dealers serving subprime and deep subprime consumers, the average listing price of their cars has nearly doubled since the start of the pandemic, according to the CFPB.

“That high-risk, high-risk group of consumers is getting hit very, very hard by inflation. That group of people did not have much disposable income. They had to finance a more expensive car and then prices went up overall. There’s a lot of stress,” Kelly said.

Ally Financial, which has a significant portion of loans to subprime borrowers, said in its October results report which expects non-performing loans to rise to 3.8% compared to 3.1% in 2019.

Another risk to car buyers’ finances is the increasing duration of auto loans, many of which now exceed seven years. While those longer-term loans can lower monthly payments amid higher prices, consumers risk paying off the loan much more slowly than the car depreciates, leaving them in the dark if they need to sell the vehicle. It can also mean higher interest costs over the life of the loan on top of already inflated vehicle prices.

For consumers, there is unlikely to be any relief over the next year. Interest rates are expected to remain high for those who need a loan to buy a vehicle, and Covid-related plant closures and material shortages continue to impact the auto manufacturing supply chain, limiting the amount of new vehicles.

“I dare to think about what happens to people who apply for new loans today,” Drury said. “It’s not going to get any better when we see these very high payouts.”