Rising Auto Loan Delinquencies: Implications for the Automotive Market in 2025
The Current State of Auto Loan Delinquencies
By Mr. Hale
November 28, 2024
The automotive market faces a significant turning point as rising auto loan delinquencies signal increasing financial strain for consumers. This trend not only affects lenders and dealerships but also shapes the strategies automakers will need to adopt moving into 2025. Here's a comprehensive look at the data, its implications, and how industry players can respond effectively.
The Current State of Auto Loan Delinquencies
Recent data reveals a worrying increase in auto loan delinquencies across all borrower segments. According to NADA, delinquency rates have reached their highest point in over a decade, with 3.8% of all auto loans 60 or more days past due in Q3 2024, a jump from 3.6% in Q2 2024.
Subprime Borrowers Hit Hardest: Subprime delinquency rates are climbing at an even faster pace, now exceeding 1.6% for loans over 60 days delinquent. This reflects a disproportionate impact on lower-income borrowers as vehicle affordability continues to decline.
Negative Equity Increasing: Over 30% of borrowers with vehicle loans in 2024 are now in a negative equity position, owing more on their loans than their cars are worth. This is a direct result of inflated car prices and extended loan terms that push costs further into the future.
Why Are Delinquencies Rising?
1. Vehicle Affordability Challenges
The average transaction price (ATP) of new vehicles in October 2024 was $48,900, while used vehicles sold for an average of $28,900. Loan rates for new vehicles hover around 9.6%, and used vehicle loans average 13.5%. These elevated rates, coupled with rising vehicle costs, mean monthly payments often exceed $750 for new cars, a historical high.
2. Economic Pressures
High inflation, increasing housing costs, and stagnant wage growth have left many households with reduced disposable income. For middle-class buyers—a primary target for mainstream automakers—this squeeze has made car ownership feel like a luxury.
3. Longer Loan Terms
Nearly 40% of all auto loans issued in 2024 exceeded 72 months. While these terms lower monthly payments, they come at a significant cost: higher total interest paid over the loan’s life and greater exposure to negative equity if the car depreciates faster than the loan is paid off.
The Clear Implications for Dealers, Lenders, and Consumers
Dealerships
Delinquency trends force dealers to adapt their sales and financing strategies. For dealerships:
Used Cars Will Dominate: Dealers should prepare for a shift in consumer preferences, as affordability pressures push more buyers toward pre-owned vehicles.
Reconditioning Costs Will Matter: With more repossessed vehicles entering the market, dealerships need efficient systems to refurbish these cars and maintain profitability.
Flexible Financing Will Be Key: Partnering with lenders to offer creative financing options—like deferred payments or tiered-interest programs—can help capture hesitant buyers.
Lenders
For lenders, rising delinquencies demand a balance between risk mitigation and maintaining access to credit for consumers.
Tightening Standards: Many lenders are increasing down payment requirements and tightening credit standards, which may exclude some borrowers from the market altogether.
Revised Loan Structures: Shorter loan terms and capped interest rates for specific borrowers can reduce the long-term risk of delinquency.
Consumers
Buyers face tough choices as financing becomes more restrictive.
Affordability Over Aspirations: Many consumers are downgrading their preferences, opting for smaller vehicles or base models to stay within budget.
Shifting to Leasing: Lease penetration rates are expected to rise as monthly payments for leases remain lower than traditional financing.
How Automakers Are Responding
Mainstream Automakers
Toyota, Ford, and GM are refocusing their production strategies to include smaller, more affordable models. Additionally, hybrid models—offering lower total cost of ownership—are gaining traction among price-sensitive buyers.
Luxury Automakers
Luxury brands like BMW and Mercedes-Benz are feeling the pinch at the lower end of their model ranges. However, their strong foothold in the electric vehicle (EV) market—where buyers are less price-sensitive—provides a buffer against the broader market decline.
Electric Vehicle Makers
Tesla, Rivian, and Lucid stand to benefit from shifting consumer preferences toward EVs. Despite rising interest rates, EV buyers often access federal and state incentives that make financing more manageable. Tesla, in particular, maintains an advantage with its direct-to-consumer model, sidestepping dealer challenges and offering more transparent pricing.
The Clear Path Forward
For Dealerships:
Train Finance Teams: Equip staff to better educate consumers about loan structures, total costs, and long-term affordability.
Have a pricing strategy: this will become increasingly important and vital.
For Automakers:
Enhance Incentives: Manufacturer rebates, low-interest financing, and loyalty discounts can help ease affordability pressures.
Focus on Retention: Automakers should invest in loyalty programs to retain current customers, especially as affordability concerns may delay new vehicle purchases.
For Lenders:
Proactively Engage Borrowers: Offering forbearance options or loan modifications early in the delinquency process can reduce repossessions and maintain customer relationships.
Closing Thoughts
The rise in auto loan delinquencies is a wake-up call for the automotive industry. By acknowledging the economic realities facing today’s consumers, the market can adapt in ways that prioritize accessibility and sustainability. From dealers to automakers, success in 2025 will hinge on flexibility, customer focus, and proactive financial solutions.