In the United States, most cities are built around highways – and in most places, public transit is inefficient.
In practical terms, that means in order to have a stable job, raise children and be independent, you need a vehicle.
It’s also why some recent data from credit scoring company VantageScore was shocking. According to the agency, car loan delinquencies have gone up 50 percent in the last 15 years.
Why this is happening and what it means is something U.S. economics correspondent for The Telegraph, Melissa Lawford, has been reporting on. She joined the Standard to discuss. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: What are some of the causes of these car loan delinquencies, which I understand have really skyrocketed over the past several months?
Melissa Lawford: Yeah, the figures are really alarming. And what’s particularly worrying is what’s happening in the subprime sector. So that’s people who are on low incomes, maybe have bad credit ratings. Among those borrowers, delinquencies are actually at a record high, which means they’re even worse than they were during the financial crisis, which is quite an astounding statistic.
When it comes to why, there’s two things really. The first part is the car market. The average price of a new car in the U.S. has gone up by about 35% since 2019, and it’s just passed $50,000 this year.
Now add to that the fact that interest rates have gone up rather a lot compared to where they were and the average monthly payment on a new car loan is $761. Even on a second-hand car it’s $570 and that’s about $300 more than it was back in 2019. I mean, I think anyone can sit there and understand that that is a huge amount of money.
Then there’s a bigger story going on because this isn’t just about the car market, it’s about what is happening to poorer households, even just middle-income households, and that is that everyone is struggling a lot. You know, that’s the bit that is really worrying.
I was speaking to the American Counseling Consumer Credit Organization, and they’re a nonprofit, they help people with debt and the number of people calling them in 2019 it was 33,000 across the entire year. Now, so far this year, and we’re only at October, that number’s at 54,000. That’s a jump of two-thirds, and we are not at the end of the year. And people are coming to them, they’ve got more debt, and they’re also coming to them on higher incomes.
So, you know, previously the average person phoning them up and asking for help with their debt had an income of about $50,000 a year. This was in 2024. Now the average person has an average income of $75,000. But that just happened in the last year.
I think these are all warning signs that a lot of families are under a huge amount of financial strain. And the really worrying thing is that this is happening now when unemployment’s at 4.3%, which historically is pretty low. So I’m a bit scared about what happens when unemployment starts going up.
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Yeah, because this doesn’t seem to be an issue, or for the most part, a matter of a lot of people not having jobs and therefore defaulting on their car payments. This is a much more complicated and perhaps ominous story if you have people who have good-paying jobs, unemployment rate is around 4.5%, something like that, and yet we’re still seeing record number of delinquencies.
What happened? I know that the prices of cars went through the roof back in, well, of course, COVID times – right after COVID, as well. We were seeing the cost of what we used to think of as a rather modest car up around the $30- to $35,000, sometimes $40,000 range. Used cars, you couldn’t find them for a long time for anything like what most people could afford.
So is this basically the result of people taking out loans that they just perhaps shouldn’t have?
I think people are getting squeezed on multiple fronts right now. You know, speaking to the American Consumer Credit Counseling, they were saying people have started using their credit cards just to buy food. People’s rent has gone up, food prices have gone up. We have this hangover from the awful rates of inflation we saw during the pandemic.
So, you know, maybe someone was okay taking out a loan when they did and now they’re getting squeezed on so many more different sides. Or, you know, sometimes I think what happens is someone bought a car a few years ago. Now they want to buy the same car, but the price has gone up so much that even to just continue doing what they were doing, they have to take out a vast loan.
I think it’s this whole confluence of issues that’s just putting more and more pressure on people from so many different sides.
For most folks, buying a car, that’s the most expensive thing you’re ever going to buy – other than a house, maybe, for a lot of folks. And I’m wondering if, given the rate of defaults that we’re seeing now in cars, could that trigger a recession unto itself the way that, say, the mortgage defaults did back in 2008 to 2009?
So the car loan delinquencies that we’re seeing are really alarming in themselves. 1.7 million cars were repossessed last year. That was the highest since 2009.
And as you say, this is really significant because it’s the last thing that people let themselves default on. It’s how people get to work. And there’s that awful saying, which is,”you can sleep in your car but you can’t drive your house to work.”
So yeah, if people are defaulting on their car loans, it’s a really worrying sign that they’re in a terrible place. And they’re also there at a point where their situation is only going to get worse. I mean, if they can’t drive to work, maybe they’re going to lose their job. It has this kind of waterfall effect.
When it comes to what is going to cause a recession, that comes down a little bit more to the financial system. The numbers are not as worrying as they were in the run-up to 2008 because the car loan sector is much smaller than the subprime mortgage sector. So back in 2008, it was something like 2.3 trillion in subprimed mortgage debt that suddenly got, you know, that sector suddenly got very, very bad, whereas now when it comes to subprime auto loans, there’s only about $330 billion in subprime auto loans.
So it’s not as much of a risk to the financial system in terms of the kind of ricochet effects that we could see across the lending environment, but it’s still very, very worrying.
