Auto Loan and Credit Delinquency Rates Are Rising: Are You Vulnerable?
The pandemic and the recent period of high inflation have taught many Americans how to be thrifty and curb discretionary spending. Still, household debt continues to soar out of control.
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At the beginning of February, the Federal Reserve Bank of New York’s Center for Microeconomic Data issued its latest Quarterly Report on Household Debt and Credit detailing U.S. debt balances, including a $17.5 trillion total household debt for the fourth quarter of 2023.
Over the quarter, credit card balances increased by $50 billion to $1.13 trillion while auto loan balances continued to shoot up, rising $12 billion to $1.61 trillion. Approximately 8.5% of credit card balances and 7.7% of auto loans moved into delinquency in Q4 2023, according to the Fed. Delinquency rates increased for all debt types except student loans.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”
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Why Are Auto Loan and Credit Card Delinquencies Increasing?
Overwhelming debt can be attributed to a slew of economic factors, including record interest rates and inflation. However, as Bloomberg noted, the end of stimulus payments and the ebbing of mortgage and student loan forbearance is causing people to rely on credits cards for their daily spending.
As a result, lenders are enjoying profits while the typical American is struggling. According to LendingTree, the average APR in 2023 Q4 was 21.47%. For cards accruing interest, the average was 22.75% — and for new credit card offers, the average is 24.66% today, which is the highest rate the site has seen since it began tracking rates monthly in 2019.
While new and used car inventories are returning to pre-pandemic days and prices are slowly creeping down, sticker prices and loan interest rates are still discouragingly high. When car prices skyrocketed in 2021, the average amount of a newly originated loan rose by 11%, followed by another 10% in 2022 to an average amount of nearly $24,000. During the five years before the pandemic, the amount borrowed for an auto loan increased by less than 1% per year.
Who Are the Most Vulnerable?
Trying to manage credit cards with eye-popping rates is hard enough for the typical American, but it’s particularly taxing for certain sectors of the U.S. population.
Mortgage debt accounted for more than half the gain of U.S. household debt in the fourth quarter of 2023, so homebuyers with higher loan-to-value (LTV) ratios would be more vulnerable to debt, delinquency and financial stress.
But almost a quarter of the rising debt in 2023 Q4 was from credit cards, and the rise has been sharper than for auto loan debt. Auto loan delinquency has appeared to moderate over recent quarters, yet credit card delinquency rates have soared. The Fed found that the most debt and delinquency-vulnerable U.S. populations are younger people and those belonging to lower-income households.
Consumers aged 30 to 39 are struggling with delinquencies on credit cards, possibly because they have outstanding student loans as well. We won’t know delinquency rates on student loans until later this year, thanks to President Biden’s repayment leniency program, per Bloomberg.
According to LendingTree, the residents of the eastern U.S. states of New Jersey (average credit card debt, Q4 2023: $8,909), Connecticut ($8,640), Maryland ($8,626), New York ($8,566) and Massachusetts ($8,447) have the most credit card debt. However, lowest-income areas persistently have the highest debt delinquency rates, per the Fed.
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This article originally appeared on GOBankingRates.com: Auto Loan and Credit Delinquency Rates Are Rising: Are You Vulnerable?
