Inflation-squeezed Americans are defaulting on their auto loans at levels not seen in nearly three decades as record-high borrowing costs threaten to price many Americans out of the market.
The percentage of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September — up from a previous high of 5.93% in January, according to Bloomberg, citing Fitch Ratings data.
For those with the best credit scores of at least 750, average interest rates are about 5.07% for a new car and 7.09% for a used one, according to Bankrate.
Buyers with credit scores of less than 640, meanwhile, are looking at distressing interest rates of about 14.18% and 21.38% for new and used cars, respectively.
September’s delinquency rate is the highest seen since 1994, Fitch reported, which can be attributed to the Federal Reserve’s decision to hike interest rates to their current 22-year high, between 5.25% and 5.5%.
Fed officials unanimously decided to hold interest rates steady last month — the second pause in the six policy meetings central bankers have had so far this year — though they’ve signaled that another hike before year’s end remains on the table.
Should the Fed keep rates higher for longer in its quest to bring stubbornly high inflation back down to 2%, defaults on auto payments are likely to persist.
To make matters worse, Americans are also defaulting on their credit card loans, with delinquencies reaching 3.6% so far this year, according to credit agency Equifax — and looming student loan payments surely won’t help the situation.
Vulnerable individuals already squeezed by high rents and grocery prices will also need to start making student loan payments next month after their debts were paused for more than three years.
Denver resident Josephine Corvacchioli, who has a 580 credit score, told Bloomberg that she’s paying an interest rate of 13.58% on her 2019 Honda Ridgeline truck, which retails for anywhere from $24,500 for a used model to over $43,000 for new, according to listings on Carfax.
Though it’s unclear what Corvacchioli’s Honda pickup truck is worth, she pays roughly $700 monthly for the loan and insurance, per Bloomberg.
The 28-year-old makes $17.50 an hour at Costco, making it difficult to meet her car payment along with her rent, all while she tries to pay down more than $20,000 in credit card debt, Bloomberg reported.
She’s reportedly tried to trade the truck in for something cheaper, which has proven difficult given that she’s behind on her car payments.
Corvacchioli told Bloomberg that she’s worried her vehicle may be seized. “It’s a constant thing for me, I’m checking it to make sure it’s not repossessed.”
“They said as long as I pay before the next pay date, I’m fine, but have to make a payment before next month,” she said.
It’s situations like Corvacchioli’s that have made many borrowers turn to opening new lines of credit — even as the average interest rate hit a record 20.6%, according to Bankrate — to try to pay off their debts.
There are 70 million more credit card accounts open now than before the pandemic in 2019 and credit card debt surpassed $1 trillion for the first time ever this year, according to the New York Federal Reserve.
The interest rates on credit cards could soar even higher as the Fed mulls another rate hike at the end of the month to bring inflation down to its target rate of 2% — from its current 3.7%.
Fed officials will meet next on Nov. 1.