Despite rising prices of new and used cars, the dramatic increase in the size of the average car loan, and industry concerns about affordability, loan delinquencies remain low, according to credit rating agency Experian.
But with gas prices having climbed 50% during the past year, and with drivers paying an average of $3.32 a gallon for regular, SUV owners are looking for ways to downsize into a smaller, more fuel-efficient vehicle, according to SwapALease.com.
According to the site, drivers of leased vehicles are using online services to match them with someone who’s not affected by rising fuel prices and willing to assume the remaining contract.
That’s the picture painted of the current financial state of automotive buyers.
Of the two, rising MSRPs are the bigger concern
Fuel prices are at their highest prices in nearly a decade, which is clearly impacting budgets as the price of all goods and services are rising. But the availability of gas-electric hybrids can minimize the impact of fluctuating fuel prices, particularly when they’re at their peak.
Of the two, the bigger concern comes from the rising price of vehicles.
According to Experian, the average new vehicle loan amount increased 8.5% year-over-year to $37,280 in the third quarter of 2021, up from $34,682 in 2020. Average used vehicle loan amounts increased more than 20% year-over-year — jumping to $25,909 in the third quarter 2021, from $21,622 in 2020.
This translates into bigger average monthly payment grew as well. For new vehicles, that averaged $609 in 2021, up from $565 in 2020, and $465 for used vehicle loans, up from $401 in 2020.
But don’t blame interest rates for the higher payments. Year-over-year, the average interest rate for a new vehicle loan decreased to 4.05%, from 4.23% in 2020. Similarly, used vehicle rates dropped to 7.98% from 8.39% the previous year.
Where’s the strain?
With such dramatic price increases, it might be expected for delinquencies to rise along with larger payments, but that’s not the case.
According to Experian, 30- and 60-day delinquencies are low. Thirty-day delinquencies saw a slight 0.01% increase to 1.66% from 1.65% in 2020. while 60-day delinquencies remained flat at 0.55% year-over-year. Remarkably, both rates are lower than 30-day 2.35% rate and 60-day 0.79% rate seen in the third quarter of pre-Pandemic 2019.
“Vehicle prices have been on the rise for some time, so it’s a positive sign to see delinquencies remain so stable. Consumers are demonstrating their ability to manage these larger loans and higher monthly payments,” said Melinda Zabritski, Experian’s senior director of automotive financial solutions.
But she doesn’t think we’re out of the woods just yet.
“With the sizable increases that we’ve seen in loan amounts this quarter, delinquencies will be an important metric to monitor in the quarters to come.”
What’s driving the price increases
In September 2021, the average new car cost $45,031, up $4,872, or 12.1% from the previous year according to Cox Automotive. The large price increases are being driven by strong demand for luxury cars, pickups and midsize SUVs, which may explain why delinquencies aren’t rising dramatically despite escalating sticker prices. These consumers are more financially able to handle higher prices.
But all car buyers are facing higher prices. According to J.D. Power, 87% of new cars sold during the past two months sold at sticker price or more, in some cases, $10,000 or more above sticker price.
The higher prices are a result of the Pandemic, which drove a surge in demand for personal transportation as vehicle production was pared back. Inventories have continued to decline due to semiconductor shortages and supply constraints. Given the scarcity, OEMs are placing their chips in higher end products with larger profit margins. Look for more of the same until semiconductor supplies return to their normal levels.