Auto loan debt surging and so are missed payments

According to a recent report, Americans now owe more on car loans than they do on education. (iStock)

According to a recent blog, the Federal Reserve’s aggressive interest rate hikes have pushed auto loan rates to new highs, with Americans now taking on more debt to finance cars than student loans. .

According to , auto loan debt has exceeded student loan debt for the first time. automo blog. As of the end of the second quarter of 2023, auto loan debt totaled more than student loan debt, and auto loan debt increased to his $1.58 trillion, exceeding his $1.57 trillion in student loan debt. Ta.

Part of the reason auto debt has increased is higher interest rates. The Federal Reserve has raised interest rates 11 times since March last year in an effort to curb the economic slowdown and soaring inflation, raising the federal funds rate to 5.25% to 5.5%, the highest level in 22 years. During that time, the annual percentage rate (APR), or the amount Americans pay to finance a new car, rose to 7.4%, and used car prices rose 11.2% since the second quarter, according to a recent Edmunds study. investigation.

The dramatic increase in annual percentage rates (APR) starting in 2022 plays a big role in increasing car payments above student loan payment rates, but it’s not the only factor impacting auto loan debt.

“Probably the biggest factor contributing to auto loan debt is vehicle price,” Melinda Zabritsky, director of auto finance insights at Experian, told Automoblog. “Inventory shortages have caused vehicle prices to rise, resulting in car buyers having to take out larger loans.Although this trend has subsided a bit, consumers are still buying more expensive cars. For example, SUVs will be 60% financed for new vehicles in the second quarter of 2023.”

If you want to save money on your car, consider changing your car insurance company to get a lower monthly premium. Visit Credible to shop and find the premium that’s right for you, without affecting your credit score.

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Lenders withdraw from the market

As car debt has skyrocketed, so too has the rate of missed payments. According to the Federal Reserve, car loans have been delinquent for more than 60 days. It increased again in September. For the fifth month, it was up 13.3% year over year. The delinquency rate for subprime borrowers hit 6.1% in September, the highest level in nearly 30 years, and the highest rate since 1994.

Lenders have responded to the evolution of the auto industry by tightening restrictions on auto financing.Approximately 30% of financial institutions responded Recent Fed research He said lending standards had become significantly stricter.Some car finance companies citizen financial groupCapital One and others have scaled back the auto loan portion of their business, only to exit the market altogether.

“Demand will decline as financiers withdraw from the market, less credit is available, vehicles become more expensive, and inventory declines, pushing customers away from affordability,” Zabritsky said. Stated.

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Here’s how to reduce your payments

To lower the cost of financing a car purchase in today’s high interest rate environment, you can take the following steps.

Work on your credit score

There is no universal minimum credit score required for a car loan. Still, in a tight lending environment, your credit score can have a big impact on loan approval and terms. A recent Fed study found that many banks are less likely to approve a car loan application from a borrower with a FICO score of 620, and in some cases even a 680 score may be rejected.

save as a down payment

Making a down payment on a car loan increases your chances of approval and potentially lower interest rates. Increasing the amount you prepay reduces the amount you borrow and reduces the interest you pay overall.

Shop for the best loan terms

You may find a better deal if you look for a pre-approved loan in a high interest rate environment. Consumers should be just as eager to shop for pre-approved financing as they are to buy the actual car.

Buying an old car with low mileage

A used car can be a better deal than a completely new car. Many cars lose 20% of their value within their first year. You can realize those savings by purchasing a new used car.

If you’re worried about rising car prices and want to save money, consider finding a new car insurance company to lower your monthly premiums. Visit Credible to compare multiple car insurance companies at once and choose the one that’s best for you.

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