One of the many consequences of high inflation and surging used car prices.
More Americans are falling behind on car payments these days than before the high inflation, cooling job market, and other challenges that are keeping millions awake at night. Unfortunately, this leads to a growing number of auto repossessions, and the trend is expected to continue.
Per Bloomberg, the number of subprime auto borrowers in December who were at least 60 days late on their payments increased by 5.67%, up from a seven-year low of 2.58% in April 2021.
For a greater perspective, the rate was 5.04% in January 2009 when the Great Recession was at its peak. High interest rates are simply making it more and more challenging to make those monthly payments.
In December 2022, the average new car loan rate was 8.0%, an increase from 5.15% the year prior. For subprime borrowers, the rate is typically higher. One individual interviewed had their 2013 Dodge Journey repossessed after they fell behind on the monthly payments. The monthly bill for his car hit $1,000, including insurance.
Why is that so insanely high? Because of an equally insane 26% interest rate.
There's also the $1,100 repossession fee if this person somehow managed to save up to get the aging crossover back. One major hurdle: they're unemployed after getting fired because they didn't have a car to drive to work. As bad as all that sounds, repossession rates today are lower than pre-pandemic levels.
One auto auction company, Manheim, reported: "The number of repossessed cars increased 11% in 2022 compared to the prior year, but that was still down 26% from 2019." It's also important to note that in many states, a lender can repossess a vehicle the first time a payment is not made though typically, it takes up to three payments for that to happen. And once that vehicle is seized, it can affect the borrower's credit score for around seven years.
Affordability is the underlying struggle here. There is no immediate solution, according to Cox Automotive, an auto industry research and data firm. One positive sign is that used car prices are finally returning to normal following record highs.
But chances are auto repossession rates are likely to increase in the coming months.
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