A potential slowdown in the U.S. economy from the coronavirus could spell trouble for a growing number of borrowers who are months behind on paying their car loans.
Near the end of 2019, more than 7 million Americans were 90 or more days delinquent on those loans, which is 1 million more than at the end of 2010 when borrowers emerged from the Great Recession.
Auto debt rose to $1.33 trillion in the fourth quarter, up $16 billion from the previous quarter, according to the New York Fed’s quarterly household credit and debt report. Almost 5% of auto loans are 90 days or more delinquent, the highest percentage since the third quarter of 2011.
If there is a slowdown in the economy, that could lead to companies getting their profits squeezed, which could then result in job losses, says Tendayi Kapfidze, chief economist for LendingTree.
“There’s a lot of people who don’t have an emergency fund or savings,” Kapfidze says. “If they’re not getting that regular paycheck, they could very quickly come under financial strain.”
Borrowers could suffer repercussions for defaulting on their loans like having their car repossessed, which could result in a significant drop in their credit score. The average monthly car payment in the U.S. is $550 for new vehicles, $393 for used and $452 for leased.
Gen Xers, who are the most likely to have a car loan, carry the highest balances, with a median of $19,313.
Car debt, however, makes up a smaller portion of all household debt. Auto debt is roughly 10% of American consumer debt, compared with mortgage debt, which takes up 68% of total consumer debt balances, according to LendingTree.
“Auto loans wouldn’t be a systemic issue like, say, the housing crisis was over a decade ago,” says Kapfidze. “But I do think if the U.S. economy weakens for some other reason like with the coronavirus, then we’ll see an acceleration in the rate of auto loan delinquencies.”
Americans owe more than $1.2 trillion in auto loan debt. Among the main drivers for car buying in recent years was low interest rates and a strong labor market.
Auto loan delinquencies are at a record as lower-income borrowers have struggled to pay back debts, a potential red flag for the U.S. economy.
Still, serious auto delinquencies trail mortgage delinquencies.
“We haven’t seen the same type of issues in the auto lending space that we saw during subprime mortgage crisis in the Great Recession,” says Glenn Munro, strategic advisor at Lightico. “The verification process has been more rigorous to get a loan.”