Auto Owners Can’t Keep Up As Inflation/Interest Race Ahead

By: Kaydee Ambas · January 31, 2023 · Reading Time: 4 minutes

Rising Car Loan Defaults

In the wake of the financial crisis of 2008, many Americans defaulted on their car loans and mortgages. Today, late car payments are occurring at an even faster pace than in 2009.

In December 2022, the percentage of subprime borrowers more than 60 days late on their payments was up by over half a point from its Great Recession era peak. And it is more than double the recent low in April 2021.

The cost of used vehicles climbed during the pandemic, meaning car buyers took out larger loans. Buoyed by stimulus checks, a robust stock market, and ample job opportunities, the cost of financing seemed reasonable. But times have changed.

Repossessions and Collateral Damage

After years of tepid price growth, inflation began to climb in late 2020. It remains near 40-year highs today. As broad-based price increases have squeezed Americans’ wallets, many are faced with difficult choices. Car payments may be put on pause to pay for necessities like food or rent — which have raised 11.4% and 7.5% year-over-year, respectively.

Car owners with adjustable-rate mortgages (in which the rate will be fixed for three, five, seven, or 10 years and then periodically adjust) have been hit especially hard, as they now face the twin troubles of inflation and rising interest payments on their debt. On the macro level, there was an 11% increase in the number of repossessed cars in 2022 compared to the prior year. On the individual level, this can trigger a host of negative events, including loss of income if an individual’s job is car-dependent, and slashed credit scores.

Get Into Gear

Since March 2022, central bank policymakers have attempted to dampen inflation by increasing interest rates. Although the Fed has had some success, there is still a long way to go to reach the 2% inflation target. Many Americans remain financially debilitated in the face of high inflation and rising debt costs. Car payments are just one in a slew of increased expenses, from mortgages to medicine to groceries.

If you’re among the many struggling to meet car payments, there are fortunately a few strategies that could help abate the pain:

•   If you’re facing acute financial pressure, some lenders may approve a deferment, allowing you to skip a month or two of payments without defaulting.

•   If you’re expecting a tax return, it might be worth putting it toward your auto loan as a one-time payment.

•   Refinancing a car loan may make sense for borrowers who can secure a better interest rate or otherwise more preferable terms than they have on their existing car loan.

When refinancing an auto loan, a lower interest can help borrowers pay less in interest over the life of the loan. Alternatively, borrowers may extend their repayment to secure lower monthly payments. This ultimately makes the loan more expensive in the long run, but can make the loan payments more affordable on a monthly basis. You can compare auto refinancing rates from top lenders with Lantern by SoFi.

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