The repossession of cars is a warning sign for the economy

WASHINGTON — A growing number of consumers are falling behind on their car payments, a trend that financial analysts predict will continue, as a sign of the strain rising car prices and long-term inflation are putting on household budgets.

At the start of the pandemic, repossessions fell, as Americans got a boost from stimulus checks and lenders became more willing to take on delinquent payments. But in recent months, the number of people with payment arrears is approaching prepandemic levels, and for consumers on the lowest incomes, loan defaults are now higher than in 2019, according to data from credit rating agency Fitch.

Industry analysts worry the trend will only continue into 2023, with economists expecting unemployment to rise, inflation to remain relatively high and household savings to decline. At the same time, a growing number of consumers are having to stretch their budgets to afford a vehicle; the average monthly payment for a new car is up 26% since 2019 to $718 per month, and nearly one in six new car buyers spend more than $1,000 per month on vehicles. Other costs associated with owning a car have also skyrocketed, including insurance, gas, and repairs.

“These repossessions are happening to people who two years ago could afford that $500 or $600 a month, but now everything else in their life is more expensive,” said Ivan Drury, director of insights at car buying website Edmunds. “That’s where we start to see the repossessions happen, because it’s just everything else you start to pin down.”

‘Recipe for disaster’

For those in the repossession industry, it’s been hard to keep up. Jeremy Cross, the president of International Recovery Systems in Pennsylvania, said he can’t find enough repo men to meet demand or room to hold all the cars his company needs to take back. He’s been especially busy with the holiday season approaching, as people prioritize spending elsewhere, and he expects things to keep up next year and 2024.

“Right now it’s really the perfect storm,” Cross said. “For the last two years car prices were too high because there were no new cars, people were still buying like crazy because they had a lot of cash to stay home, they had too high credit scores so it was like a recipe for disaster .”

At the same time, the number of repossessions has shrunk by 30% as many companies closed shops and workers found jobs in other industries as repossession tumbled into 2020, Cross said. Now, he said, lenders are paying him premiums to repossess their cars first in anticipation of a continued increase in loan defaults.

“Volume is picking up and the remaining companies that are still doing repossessions are very busy,” Cross said. “The overall numbers are still not prepandemic numbers, but we will see a big change coming in ’23 and ’24 that I think the lenders are starting to recognize because they’re offering financial incentives that they never had to in the past. They compete for position knowing that there is only a certain amount of bandwidth available.”

It’s an issue that has raised concerns among Consumer Financial Protection Bureau officials, who say they see worrying signs in the auto market, especially among so-called subprime borrowers, who have below-average credit scores, and those with loans taken out in 2021 and 2022 when car prices were particularly high.

“Loans taken out in those years are underperforming compared to previous years just because those consumers had to finance cars when supply chains stalled and prices started to rise,” he said. Ryan Kelly, acting auto financing program manager for the CFPB. “Those consumers were hit twice by inflation. First when they had to finance a car after prices rose, and then when they had to fill the car with petrol after the conflict between Russia and Ukraine started. So there is simply a lot of consumer stress.”

If the economy deteriorates, as many economists predict in 2023, the number of people falling behind on their car payments will continue to rise, even as consumers tend to prioritize their car payment over most bills due to the importance a car plays in going to work or possibly providing shelter, industry analysts said.

However, the number of defaults and repossessions is not expected to reach the level of 2008 and 2009, when there was a spike due to the financial crisis. The percentage of auto loans that were 30 days past due was 2.2% in the third quarter, compared to 2.35% past due over the same period in 2019, according to data from Experian. By contrast, in 2009 just over 4% of auto loans defaulted.

“We expect it to continue rising and perhaps even breach prepandemic levels because of the macroeconomic headwinds of higher interest rates, higher borrowing costs and the expectation that unemployment will continue to rise,” said Margaret Rowe, chief auto analyst at Fitch. . “I think our expectation is that we’ll continue to see it go up, but it’s just been so low that even going up isn’t like we saw in the Great Financial Crisis.”

‘Much stress’

Analysts at Cox Automotive predict that while loan defaults and repossessions will increase from their pandemic lows, they predict long-term defaults and repossessions will remain at or below historical norms through 2025.

Still, the financial strain has been particularly hard on lower-income consumers looking for low-cost vehicles, which have been particularly hard to find. While in the past those car buyers would have bought a used car for $7,000 to $15,000, now they have to spend $20,000 to $25,000 for the same type of vehicle. Among dealers targeting subprime and deep subprime consumers, the average list price of their cars has nearly doubled since the start of the pandemic, according to the CFPB.

“That group of consumers who are near prime and sub-prime is hit very, very hard by inflation. That group of people did not have much disposable income. They had to finance a more expensive car and then they were hit by rising prices. There’s just a lot of stress,” Kelly said.

Ally Financial, which has a significant share of loans to subprime borrowers, said in its October earnings report that it expects delinquencies to increase to a whopping 3.8%, compared to 3.1% in 2019.

Another risk to car buyers’ finances is the growing length of car loans, many of which now exceed seven years. While those longer-term loans can reduce monthly payments at higher prices, consumers risk paying off the loan much more slowly than the car depreciates, leaving them underwater if they have to sell the vehicle. It can also mean higher interest costs over the life of the loan, on top of already high vehicle prices.

For consumers, there will probably be no relief in the coming year. Interest rates are expected to remain high for those who need to borrow to buy a vehicle, and Covid-related factory closures and material shortages continue to travel through the auto manufacturing supply chain, limiting the number of new vehicles.

“I dare to imagine what happens to people who apply for new loans today,” Drury said. “It doesn’t get any better when we see these payments this high.”