Used-Car Loan Delinquencies Rise

Delinquencies for used-auto loans have reached levels not seen since the Great Recession of 2007 through 2009, according to a new report. The delinquencies are concentrated in the subprime sector, but impact all used-car loan seekers, says Jill Louden, associate director of product management for S&P Global Mobility.

That means dealers should prepare to tell customers why interest rates are high and loan approval may be difficult to obtain. "If you are not subprime and are trying to buy a used car, there is probably some good financing available,” says Louden. “But no matter what, we are seeing in the data that average monthly payments and terms are going up.”

Delinquency rates over 60 days past due rose 26 basis points from the first quarter of 2022 to the first quarter of 2023, from 1.43% to 1.69%, according to the Credit Industry Report by TransUnion.

But, says S&P Global Mobility, the spike in delinquencies is mainly occurring in loans by the independent lenders who operate in the subprime space and who primarily finance used-vehicle purchases.

Independent lenders aren’t the only ones to feel delinquencies’ impact. Captive finance companies and major banks that work in near-prime, prime, prime-plus and super-prime originations have also raised rates.

“Everyone does have some subprime in their portfolio (and) you can’t ignore what happens with the risk associated with those loans,” says Louden.

Subprime loans represented 14.2% of loan originations in the first quarter of 2023. In comparison, near-prime represented 14.6%, prime represented 19.7%, prime-plus represented 20.2%, and super-prime loans accounted for 31.2%, according to AutoCredit Insight by S&P Global Mobility and TransUnion. 

How should dealers answer questions from customers regarding higher lending rates?

“I would tell a customer the average consumer is not getting a better deal,” Louden says. “There are not as many good deals to have when there are not as many incentives. Also, interest rates are going up, and there is not as much inventory.”

While inventory has improved, it is not back to pre-pandemic levels, says Louden. “There is still a good amount of inventory constraint out there.”

Used Prices Still Fairly High

While used prices are not at the sky-high levels seen in 2021, after softening in 2022 they are beginning to rise again. Inventory, while improved, is still a factor.

According to Cox Automotive, the total supply of unsold used vehicles on dealer lots, both franchised and independent, was 2.19 million at the end of May, up from the end of April but down 11% compared with the same time a year ago.

That is keeping the average listing price for a used vehicle fairly high. It rose every week from the first through the last week of May, says Cox, closing the month at $27,256, the highest listing price since January.

The average listing price is likely to stay “relatively high” due to fewer new-vehicle sales in recent years and a slowdown in leasing, says Cox.

Inventory availability varies by brand, says Louden, and there may be some good financing deals out there. But, she says, “It is not an ideal time to buy a car.”