More Americans are falling behind on their auto loan payments. Here's why.

U.S. auto loan delinquency rates have surged to 3.8% in June 2024, the highest level since 2010, making auto loans the riskiest credit product outside of student loans. This broad-based deterioration in consumer credit quality affects all income groups, with prime borrowers experiencing a faster absolute increase in delinquencies. The trend is primarily driven by record-high vehicle prices, elevated interest rates, and larger loan amounts leading to increased monthly payments and longer terms, further exacerbated by persistent inflation and an uncertain employment picture impacting consumers' ability to pay.

Analysis

U.S. auto loan delinquency rates reached 3.8% in June 2024, marking the highest level since June 2010 and a 50% increase over the past 15 years, according to Federal Reserve and VantageScore data. This trend positions auto loans as the riskiest credit product, excluding student loans, contrasting with declining delinquency rates in other consumer loan categories.

The surge is primarily driven by record-high vehicle prices, with new cars averaging over $50,000, and elevated interest rates, averaging 7% for new and 11% for used vehicles in September. These factors have pushed average monthly payments to $600 by January 2023, with one in five new car loans exceeding $1,000, alongside a 57% increase in average loan amounts over 15 years.

This broad-based deterioration in consumer credit quality affects all income groups, with prime borrowers experiencing faster absolute increases in delinquencies. Persistent inflation, where average wages are trailing until mid-2026, and an unsteady employment picture further exacerbate repayment challenges, increasing the risk of borrowers becoming underwater due to longer loan terms and rapid vehicle depreciation.

Key Decisions for Investors

• Evaluate exposure to auto asset-backed securities (ABS) and auto loan portfolios, particularly those with higher concentrations of prime borrowers now showing increased delinquency.
• Consider short positions or hedging strategies against auto finance companies and dealerships, given the 'strongly negative' sentiment and 'pessimistic' tone surrounding rising delinquencies and consumer credit quality.
• Monitor macroeconomic indicators such as inflation, wage growth, and employment stability, as these factors are directly impacting consumers' ability to service auto debt and could signal broader economic slowdowns.