Rising Auto Loan Delinquencies: Why Wall Street Remains Confident
Delinquencies and Repossessions: The Numbers
Rising Auto Loan Delinquencies: Why Wall Street Remains Confident
The automotive finance sector is at a critical juncture. Auto loan delinquencies are climbing to levels we haven’t seen in over a decade, and repossessions are on the rise. The headlines paint a concerning picture—borrowers are struggling to keep up with higher monthly payments fueled by rising interest rates, longer loan terms, and elevated vehicle prices. Yet, Wall Street remains unfazed, continuing to bet big on auto loans.
Let’s break down what’s really happening and why lenders, investors, and even automakers are staying optimistic despite these challenges.
Delinquencies and Repossessions: The Numbers
Auto loan delinquencies have reached a 15-year high as of Q3 2024. According to Experian, the percentage of borrowers at least 30 days late on their payments hit 2.7%, up from 2.2% in Q3 2023.
Subprime borrowers (those with credit scores below 620) are facing the greatest strain, with delinquency rates now above 6.1%.
Even prime borrowers are starting to feel the pressure, signaling that financial stress isn’t limited to one segment of the market.
Repossession rates are also climbing. In Q3 2024:
1.9 million vehicles were repossessed, marking a 17% increase year-over-year.
Negative equity (when a borrower owes more on their loan than the car is worth) reached an all-time high, with 24.2% of trade-ins carrying an average upside-down value of $6,458.
These numbers reflect a harsh reality—car ownership has become more expensive than ever. The combination of longer loan terms, higher rates, and elevated car prices (average new car price is now $48,397, per Kelley Blue Book) means borrowers are overextended and more vulnerable to default.
Why Wall Street Isn’t Worried
If you’re looking at the rising delinquencies and wondering why Wall Street isn’t panicking, the answer lies in historical data, strong risk management, and investor confidence.
Auto Loans Are Still Performing Better Than Housing Loans Did in 2008
Unlike the housing crash, auto loan defaults are rising, but they aren’t catastrophic. Most lenders anticipated higher delinquencies and priced that risk into their loans. Delinquency rates, while concerning, remain below the peak seen during the Great Recession.Investors Still Love Auto Loan-Backed Securities (ABS)
Auto loans are bundled into securities and sold to investors—a market that’s thriving despite delinquencies. According to the Wall Street Journal, demand for subprime auto loan ABS hit a record $40 billion in 2024, up 17% from last year. Some offerings were 20 times oversubscribed, indicating sky-high investor appetite.Why? These loans are short-term compared to other types of debt, meaning investors get their returns faster. Even with rising defaults, the recovery rates on repossessed vehicles remain strong because used car prices, while cooling, are still historically high.
Strong Underwriting Standards
While subprime delinquencies are surging, lenders have improved risk models since the 2008 financial crisis. New loan originations are more carefully vetted, and high-credit borrowers still dominate the market. For instance, Edmunds reported that prime and super-prime borrowers accounted for 69% of new car loans in Q3 2024.Resilient Demand for Cars
Despite affordability challenges, demand for vehicles remains steady. Automakers are supporting sales through incentives and flexible leasing programs. This keeps the pipeline moving, ensuring a healthy flow of trade-ins and repossessions back into the market.
The Role of Dealerships and Automakers
While Wall Street remains confident, dealerships and automakers are adapting their strategies to navigate these financial headwinds.
Increased Leasing Options: Automakers like Hyundai and Toyota are offering aggressive leasing programs to mitigate monthly payment challenges. Leasing now accounts for 20% of new vehicle transactions, up from 18% last year.
Targeted Incentives: To keep inventory moving, manufacturers are increasing incentive spending. In Q3, incentives averaged 7.3% of the transaction price, a significant jump from 4.8% a year ago. (Kelley Blue Book)
Certified Pre-Owned (CPO) Programs: Dealerships are doubling down on CPO sales, offering buyers affordable alternatives to new cars while maintaining higher margins. CPO sales rose 12% year-over-year in Q3.
Is Negative Equity the Real Issue?
One of the key concerns driving repossessions is negative equity. Longer loan terms (84 months or more) mean it takes years for borrowers to build equity in their vehicles. Combine this with rapidly depreciating EVs and high upfront costs, and you have a recipe for trouble.
For example:
Many EV buyers are seeing resale values plummet faster than expected due to rapid technological advancements. Tesla’s aggressive price cuts have exacerbated this issue, pushing down the residual value of their older models.
Lenders and dealerships will need to address this growing gap by offering:
More flexible refinancing options.
Loan modifications for struggling borrowers.
Better education on equity and loan terms at the point of sale.
The Road Ahead
While rising auto loan delinquencies are a serious challenge, Wall Street’s confidence signals a belief in the sector’s underlying stability. For dealerships and automakers, the key lies in balancing affordability with profitability. Strategies like increased leasing, targeted incentives, and a focus on pre-owned inventory will remain critical.
As for borrowers, the focus must shift toward financial education—ensuring consumers understand their loan terms, trade-in equity, and vehicle depreciation risks.
The automotive market is resilient, but navigating 2025 will require collaboration between lenders, dealers, and manufacturers to ensure the road ahead is sustainable for everyone involved.
Bottom Line: Rising car-loan delinquencies may look alarming, but strong investor demand, resilient used car values, and smart risk management are keeping the industry afloat. The next chapter will be about adapting strategies to protect borrowers, maintain sales momentum, and balance investor expectations in an uncertain economic environment.