Higher Car Payments Stretch Budgets

It’s always something in auto retailing.

The past four years vividly show that: The COVID lockdown came in 2020, then pent-up demand in 2021, followed by supply shortages in 2022 and the inflation-driven affordability crunch of 2023 that has carried over to this year, stretching many consumer budgets.

Car dealers see it all.

“Dealers see the people affected by inflation who come through their doors,” says Satyan Merchant, TransUnion’s senior vice president-automotive, tells WardsAuto. “The world has changed. The auto business has become volatile in the last few years.”

The cumulative result is that consumers are doing as much or more with less. That is affecting many people’s ability to make their monthly car payments on time, according to a new TransUnion study.

Monthly Payments Now “Awfully High”

The analysis indicates total monthly debt for auto-loan borrowers rose 18% in just two years. Monthly car payments averaged $512 in the first quarter of 2022 compared with $581 in first-quarter 2024 – an $828 annual increase.

“That’s awfully high,” says Merchant.

Moreover, the growth of auto-loan payment levels is outpacing income growth, causing delinquencies to rise.

Credit-tracker TransUnion reports that loan delinquencies of 60 days past due were 1.19% in 2023’s first quarter. They rose to 1.33% in this year’s first quarter.

Delinquencies reached Great Recession levels as savings fell and auto payments outpaced inflation and income growth, according to TransUnion. 

Increasingly squeezed consumer budgets are now a part of the ever-changing auto market.

“Just as auto inventories began to recover from the worst of the pandemic era, supply chain shortages, elevated inflation, and higher interest rates that followed have put consumers in a tight financial bind,” says Jason Laky, TransUnion’s executive vice president and head of financial services.

Consequently, many people have been obliged to take on additional and larger monthly payments.

That’s not great for auto sales. “This has likely contributed to some consumers holding off on buying or leasing a new auto,” Laky says.

There’s also the prospect of people – sometimes without just cause – getting turned down for an auto loan as lenders raise risk bars.   

Subprime auto borrowers experienced the greatest increases in total monthly debt payments.

“As we are continuing to see auto payments steadily increasing faster than incomes, this is placing pressure on consumers across the credit-risk ranges,” says Merchant.

Innovative Way to Assess Loan Risk

He says that bears continued monitoring by lenders. He advises them to consider making further risk-assessment adjustments, potentially through the use of additional and trended data.

In “normal times,” it may suffice for auto lenders to periodically monitor their underwriting risk models for stability and accuracy.

In a more unsettled lending environment, such as now, “that may simply not be enough,” Merchant says. “Lenders should consider additional measures to stimulate originations more confidently and maintain growth.”

Such measures can include conducting retrospective and lost sales analyses, tracking and monitoring performance across sample populations and overlaying blended scores to create dual score strategies.

TransUnion has created a concept risk-assessment model that potentially supplements conventional models used by lenders to decide individual consumer creditworthiness.

The company’s software model is for research at this point; it’s not for sale. But, among other things, it takes a deeper look at payment behavior.

“It looks closer at how people are handling their debt obligations,” Merchant says. “For example, how have they paid their credit-card debt? Do they make a monthly payment greater than what the credit-card company asks for, or do they consistently pay the minimum amount due?”

Such a system would not replace existing risk-management systems. “It would be like building an addition to a house, not building a new house,” Merchant says.

Some wary financial institutions have scaled back on auto lending, which has led to the rejection of some dealership customers’ loan applications, sometimes unnecessarily.

“Dealers would love to see risk management enhanced and used as a safe way to get their customers financed,” Merchant says. “Dealers are seeing customers affected by inflation. They would love to have lenders assess that properly with trend data and dual credit scoring.”