More and more young Americans are paying their car loans late — levels not seen since the Great Recession, according to a report from the New York Fed.
In the last quarter, 4.6% of borrowers under 30 transitioned to serious delinquency, meaning they were at least 90 days past due on a car loan payment. This figure is higher than a year ago and is the highest rate since the end of the Great Recession in 2009, when it was 4.7%.
Across all ages, new auto loans and leases totaled $162 billion last quarter, down from last year but up from pre-pandemic volume. Of all borrowers, 2.3% were at least 90 days past due on their car loan payments.
The highest rate of serious delinquency was observed among younger Americans. Torsten Sløk, the chief economist at Apollo Global Management, told Yahoo Finance that this age group struggled because they are “more vulnerable” to ongoing macroeconomic trends. (Apollo owns Yahoo.)
For example, Sløk said the Fed’s rate hikes pose a challenge. Because younger Americans have relatively less savings than older borrowers, they are less willing to pay the extra costs of the higher rates. According to Ivan Drury, the senior manager of insights at Edmunds, Americans will pay about $50 to $60 more per month on new car loans this year because of higher interest rates.
The Fed has raised interest rates in an effort by the Fed to cool inflation. That helped drive new car prices to record highs at the end of last year. Greg McBride, Bankrate.com’s chief financial analyst, said Americans don’t have the cash on hand to pay those rising car costs up front, so their average loan payments are getting higher — and less affordable.
In other words, young Americans may be biting off more than they can chew when it comes to car loans, making it harder to keep up.
“The payments are absolute budget busters,” McBride told Yahoo Finance. “The average car payment for new car buyers was $800 a month last year, [and] about one in seven buyers has a payment of at least $1,000 per month. There is no leeway there.”
In addition to the payment increase, Drury explained that more car dealers are pushing customers to finance their cars in 36 or 48 months. These shorter financing options are less affordable for those whose financial situation is more unpredictable, many of whom preferred longer payback periods.
Coming out of the pandemic, McBride said car loan delinquencies have increased “earlier” and “faster” compared to other loans, which he attributed to more lenient lending standards for borrowers with subprime credit scores. These lower scores are more common in younger Americans, according to Experian.
The increase in delinquent payments for younger Americans comes as these borrowers are likely facing a recovery in student loan payments.
“That will be very critical,” Sløk said. “It involves a very significant number of households.”
One-third of Americans ages 25 to 34 have student debt.
“If the economy weakens and goes into recession, we will see levels of auto loan delinquencies not seen in a long time,” McBride said.
Jared Mitovich is a writer at Yahoo Finance. Follow him on Twitter @jmitovich
Click here for the latest economic news and economic indicators to help you with your investment decisions
Read the latest financial and business news from Yahoo Finance