Car loan delinquencies rise ahead of possible rate cuts

Car loan delinquency rates are still on the rise, reversing course after a period of stagnating growth between March and June.

Driving the news: Auto delinquency rates ticked up in July for the 34th month in a row, according to data from Moody’s Analytics. The share of delinquent loans (3.7%) was the highest for July since 2009. While there had been hope of a mid-summer recovery, several factors kept rates elevated.

• Inflation and interest rates are taking longer to come down than most analysts expected, adding to consumers’ financial burdens.

• New car prices remain well above pre-pandemic norms, despite marginal year-over-year declines. Meanwhile, used car values have fallen sharply, hurting buyers looking to trade in their previous vehicles.

Zooming in: Delinquency rates moved at different speeds for certain consumers, reflecting the market’s overall shift.

• Loans delinquent by 30 or more days increased 10% year-over-year, matching growth rates from early 2024. This marks a shift from earlier in the summer when 30-day delinquencies were rising at a slower rate but is much improved from the 25% increases seen in early 2023.

• Interestingly, some of the worst-performing loans this year are in the prime categories. Delinquencies among consumers with credit scores between 700 and 740 jumped 85%. from 2019 levels.

• Meanwhile, subprime buyers (FICO: 580-669) saw late payments increase by roughly 10%.

Bottom line: Delinquency rates may be worsening, but the rate of growth has slowed down significantly compared to last year. While analysts expect a recovery may be on the horizon thanks to a relatively strong job market, interest rate cuts could help that along. This makes the upcoming Federal Reserve meeting later this month an important one for the auto lending industry.

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