Alarm bells are ringing as more Americans find it difficult to make their car payments on time, signaling potential trouble ahead for both the auto industry and the U.S. economy at large.
A recent Fitch Ratings report obtained by FOX Business shows that 6.11% of auto borrowers were at least 60 days behind on their car bills in September. This is the highest it’s been in almost 30 years, exceeding the previous record of 5.93% set last January.
Why is this happening? It boils down to two main reasons: soaring car prices and rising interest rates.
The government initially put a lid on the issue by sending trillions of dollars in stimulus checks to Americans during the early days of the pandemic. This helped to keep the number of cars being repossessed in check. However, prices for both new and used cars have skyrocketed since then, forcing people to borrow more money.
The average price for a new car, according to data, now hovers around $48,000, close to a record high. Meanwhile, a labor strike involving Ford, GM, and Stellantis could push prices even higher, according to experts at Kelley Blue Book.
To add insult to injury, the cost of borrowing money to buy these expensive cars is also going up. Data from Edmunds, an online resource for auto information, shows that the average rate for a new auto loan jumped to 7.4% in September, up from 6.9% at the beginning of the year.
When you’re borrowing more money at higher rates, your monthly payment is bound to rise. The result? An all-time high of 17.1% of car owners are now paying at least $1,000 a month for their vehicles, up from 16.8% at the start of the year, Edmunds reports.
Interestingly, although more people are late in making their payments, that hasn’t yet led to a surge in the number of cars actually being taken back, or “repossessed,” by lenders.
Separate data from Cox Automotive says loan delinquencies have been going up for five straight months, but the number of people actually defaulting — or failing to pay back their loans altogether — went down 9.8% in September. Nevertheless, the total number of defaults is still up by 31.7% compared to last year.
However, experts warn this could change. Cox Automotive estimates that as many as 1.5 million cars could be repossessed by the end of 2023, up from 1.2 million last year. And this number could go higher if the Federal Reserve decides to keep interest rates high for an extended period, something it has hinted at doing.
The takeaway is clear: the rise in late payments and the growing number of expensive car loans suggest that many American families are feeling the financial squeeze of soaring inflation.
This could have broader implications, not just for the auto industry, but for the U.S. economy as a whole, particularly if interest rates stay elevated. It appears Bidenomics is not economical at all.
