Despite higher prices, car loan delinquencies remain low

Rising gasoline prices are causing buyers to swap larger SUVs for smaller ones.

Despite rising prices for new and used cars, the dramatic increase in the size of the average car loan, and industry concerns about affordability, delinquencies on loans remain low, according to the rating agency Experian.

But with gasoline prices climbing 50% in the past year and drivers paying an average of $ 3.32 per gallon for a regular vehicle, SUV owners are looking for ways to upgrade to a larger vehicle. smaller and more fuel efficient, according to SwapALease.com.

According to the site, drivers of leased vehicles use online services to match them with someone who isn’t affected by rising fuel prices and who is willing to take on the rest of the contract.

It is the painted picture of the current financial situation of auto buyers.

Of the two, the higher MSRP is the biggest concern

Rising prices for new and used cars have led to increasingly larger auto loans.

Fuel prices are at their highest level in almost a decade, which is clearly having an impact on budgets as the price of all goods and services goes up. But the availability of gas-electric hybrids can minimize the impact of fluctuating fuel prices, especially when they are at their peak.

Of the two, the greater concern is the rising price of vehicles.

According to Experian, the average new vehicle loan amount increased 8.5% year-over-year to $ 37,280 in the third quarter of 2021, from $ 34,682 in 2020 to $ 25,909 in the third quarter 2021, compared to $ 21,622 in 2020.

This translates into a higher average monthly payment which has also increased. For new vehicles, this averaged $ 609 in 2021, up from $ 565 in 2020, and $ 465 for used vehicle loans, up from $ 401 in 2020.

But don’t blame the interest rates for the higher payments. Year over year, the average interest rate on a new vehicle loan has declined to 4.05% from 4.23% in 2020. Likewise, used vehicle rates have fallen to 7.98% against 8.39% the previous year.

Where is the tension?

So far, consumers seem to be able to handle larger auto loan payments.

With such dramatic price increases, one would expect defaults to increase with larger payments, but this is not the case.

According to Experian, 30 and 60 day delinquencies are low. 30-day defaults edged up 0.01% to 1.66% from 1.65% in 2020, while 60-day defaults remained stable at 0.55% year-on-year . Remarkably, both rates are lower than the 2.35% 30-day rate and 0.79% 60-day rate seen in the third quarter of the 2019 pre-pandemic period.

“Vehicle prices have been on the rise for some time, so it’s a positive sign that defaults remain so stable. Consumers are demonstrating their ability to handle these larger loans and higher monthly payments, ”said Melinda Zabritski, senior director of automotive financial solutions at Experian.

But she thinks we’re not out of the woods yet.

“With the significant increases we have seen in loan amounts this quarter, defaults will be an important metric to watch in the quarters ahead. “

What drives the price increases

Dealers charge at least the sticker price for most new cars.

In September 2021, the average new car cost $ 45,031, up $ 4,872, or 12.1% from the previous year, according to Cox Automotive. The sharp price increases are due to strong demand for luxury cars, pickup trucks and mid-size SUVs, which may explain why defaults are not rising significantly despite escalating sticker prices. These consumers are financially better able to afford the higher prices.

But all car buyers are faced with higher prices. According to JD Power, 87% of new cars sold in the past two months have sold for the sticker price or more, in some cases $ 10,000 or more above the sticker price.

The higher prices are a result of the pandemic, which has led to an increase in demand for personal transportation as vehicle production has been reduced. Inventories continued to decline due to semiconductor shortages and supply constraints. Given the scarcity, OEMs are placing their chips in high-end products with higher profit margins. Look for more of the same until semiconductor supplies return to normal levels.

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