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Cash-Strapped Americans Stuck in Auto Loan Delinquency Pitfall, 2008-Levels Don't Compare

Despite everything else getting expensive, Tesla pulled a wild card and slashed the prices of its models in the U.S., and Europe, sometimes more than 20% off the sticker price. Still, the trend-setting move doesn’t mean Americans generally can afford, or those on credit are up to date on their auto loan payments.
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It’s not a secret anymore. Automobiles are more expensive today than they were five years ago. But that doesn’t mean the American consumer will stop taking trips to the dealership. Here's the truth. They simply don’t care. When push comes to shove, they’ll just get an auto loan.

After all, the World Economic Forum published early this month that “the U.S. labor market is stronger than it has been for more than 50 years.” But here’s where everything gets dicey. Consumers with low credit scores are alarmingly falling behind on their car loan payments.

Here’s why. Impecunious Americans are still dealing with the rising cost of living while nursing the withdrawal effects of previous pandemic benefits, a.k.a Stimulus Checks.

By the fourth quarter of 2022, the market realized a sharp increase in credit card and loan delinquency. Auto loan delinquency was at 2.88%, 80 basis points higher than the previous year's.

The share of ‘subprime’ automobile loans at least 60 days late rose to more than 6% in December. To remind you, Subprime loans are loans offered to prospective borrowers with poor credit records.

But like most things offered on a silver platter, there’s always a catch. For Subprime loans, it’s the high-interest rates. The higher interest rates compensate the lender for accepting the greater risk in lending to low-cadre borrowers.

As you’d expect, many Americans with auto loans are falling behind in their auto loan payments. If the trend continues, an auto loan crisis is inevitable.

To put this into perspective, as someone with a keen eye commented about the trajectory on Reddit, “These payments are like second mortgages for these people. I expect a lot of wrecked credit scores in the next few years.”

The upward spiral of auto loan delinquency didn’t just happen by chance but mainly because crash-strapped Americans have weak finances, no longer get pandemic-period government benefits, and are increasingly using credit cards.

Still, predatory lenders offer these expensive loans (sometimes more than $700/month), well aware the borrower doesn’t have the means to pay back on time or at all. Simply put, they are set up to fail.

The truth behind the high auto loan delinquency could be partially due to lenders taking advantage of ill-advised, young, or illiterate consumers.

it is essential to note that the growing auto loan problem in America started during the COVID-19 pandemic. According to a report by the World Economic Forum, U.S. car consumers have taken on significantly more automotive debt. The highest recorded demographic who may have borrowed beyond their means are Gen Z and Millennials, based on data by the Federal Reserve.

Here’s the truth. If the consumer took some time to calculate what they’ll have paid for their car at the end of the loan duration, they’d be disgusted at the difference over the original MSRP.

Rule of thumb, if you can’t pay cash and have to take an auto loan, take note of the introductory rate. Take your time, and read through the paperwork – there could be a catch in the fine print. If nothing makes sense, tag along a knowledgeable friend.
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Editor's note: Images used are for illustration purposes

About the author: Humphrey Bwayo
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Humphrey is a car enthusiast whose love and passion for automobiles extended into collecting, writing, driving, and working on cars. He got his passion for cars from his Dad, who spent thousands of hours working on his old junky 1970 E20 Toyota Corolla. Years later, he would end up doing the same with a series of lemons he’s owned throughout his adult life.
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