When the pandemic first hit people saw a new car as either a luxury they could never afford or the perfect time to pick one up as people were being forced to sell cheap because they lost their job. Quickly that turned around 180 degrees. Closed factories in China and other parts of the globe choked off the supply of computer chips. This drove new and used prices up greatly.
Now people are back in the same habits that they were in years before. They are simply borrowing too much money for too little car. With the pandemic stimulus checks coming to an end, and other bills becoming more stringent on being paid, they are being forced to pay up or face the risk of repossession on their record.
Younger borrowers and subprime loans are the most likely to result in a repo, just as they were before the pandemic started. While auto loans are a major factor in the current inflation, this is a result of people paying too much for used cars, and in turn, people valuing their used cars higher than they did in years past.
Yes, the years of a 10-year-old pickup or imported car being found for under $2500 are long gone. Even vehicles from the mid-90s are still selling for $3000 or more if they are running. This means for the younger, or poor credit borrower is almost forced to take these horrific interest rates and overpriced, poorly maintained high mileage cars. If not, the reality of a lost job becomes ultimately very, very real.
This double-edged sword has made life very perilous for many Americans. As of May, 60+ day delinquencies are up 30% over last year, yet still below pre-pandemic levels per Cox Automotive. With the averaged used car payment coming in at $500 a month, new cars at $650, and one of every eight borrowers being on the hook for over $1,000 a month, people are racking up big loans.
Americans have racked up over $1.4 trillion in auto loans. This is double the amount from 10 years ago and has surpassed credit card debt per the Federal Bank of New York. This also means borrowers are at risk of a little talked about reality; being upside down in their car loans.
With the auto market showing signs of revival, the chip shortage starting to ease up, and repossession going up, used-car prices are starting to go down. It’s easy to see a car lose 10-35% of its value in a year. Especially if the miles are racking up on the car, or the paint is starting to suffer, people won’t pay enough to cover the cost of that car note. This is leading some lenders to predict a problem as we saw with housing that brought about the Great Recession of 2007-2009.
Subprime lenders are now under additional scrutiny. While Federal law allows them to being the repossession process when a borrower is 10 days or more in default, many states have laws against taking the car off private property or taking it with the owner attempting to fight the repossession.
This means the repo agents are taking on different tactics than in years past. They are using license plate readers and driving around town looking for potential repossessions, paying off people for tips, and taking the car anywhere they can. These fast repossessions can also come with little to no warning. If the creditor falls through, their employment can’t be verified, or they don’t make a payment in time, that car is as good as gone. Often with little to no contact from the lender or warning about their intentions.