Auto loan delinquency rates climb as Americans amass record household debt

Car shoppers look at autos in dealer showroom. Car shoppers look at autos in dealer showroom. Image:

Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors' opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when it’s posted.
Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

U.S. household debt set another record high in the first quarter of 2018. According to the Household Debt and Credit Report from the Federal Reserve Bank of New York, which uses credit report data from Equifax. As of March 31, household debt hit a staggering $13.2 trillion.

While most of that debt ($8.9 trillion) comes in the shape of mortgages, one of the report’s most startling revelations relates to auto loans.

Auto loan balances increased by $8 billion in the first quarter of 2018, continuing a trend that dates back to 2012. Auto loan delinquency rates also rose, with 4.3% of auto loan balances at least 90 days delinquent as of March 31.

The report’s data also revealed that nearly 19% of new auto loan originations were issued to consumers with credit scores below 620. Oftentimes loans issued to consumers with lower credit scores can come with higher interest rates — a factor that might be contributing to the rising rates of delinquency.

The good news? A Credit Karma analysis last year found that Americans could potentially save $37 billion by refinancing their car loans.

What does this mean for you?

As we go over in the Credit Karma Guide to Refinancing Your Auto Loan, generally speaking, the better your credit, the more likely you are to secure a lower interest rate. But even people with good credit can get stuck with a high-interest-rate auto loan. Buying a car involves a lot of decision-making and, in all too many cases, researching the best deals on financing may take a back seat.

Why should you care?

Rising auto loan delinquency rates may sound ominous, but they can act as a wake-up call.

Whether you took a bad deal on financing or couldn’t qualify for a cheaper loan at the time you bought your car, you may want to see what your options are for refinancing — it could lower your interest rate and reduce your monthly payments.

“The $37 billion is a big number, but what’s more impactful is how much some people are overspending on their loans on a monthly basis,” says Bethy Hardeman, Credit Karma’s chief consumer advocate. “A monthly savings of $100 or even $50 can make a big difference to a lot of U.S. households — and that’s just for one auto loan.”

Refinancing your auto loan could lower your monthly payments, which could help you avoid becoming delinquent or, if you become significantly delinquent, having to deal with an account in collections. This may be especially true if you live in one of the 25 cities where motorists are leaving the most money on the table.

What can you do?

If you’re in the market to refinance your auto loan, you should consider your options. You can check out some refinancing options or look for new auto loans via Credit Karma, but that’s not all. Here are some other tips that can help keep you on track with your auto loan payments:

If you already own a car

  • Know your APR. In an October 2017 survey of U.S. car owners who are currently making monthly payments on their car, Credit Karma found that nearly half — 45% — couldn’t recall the annual percentage rate on their loan. Knowledge is power; you may not know whether you can save on interest if you don’t know what you’re already paying.
  • Shop around. If you’re concerned about comparison-shopping hurting your credit scores, check out our primer on whether rate shopping can affect your scores.
  • Check out our Guide to Refinancing Your Auto Loan. It offers some great tips on whether refinancing makes the most sense and how your credit can play a role in refinancing.

If you’re shopping for a new car

  • Do your research. We don’t recommend taking the first deal you’re offered without shopping around first. When financing your new vehicle, it’s important to know your options. The Consumer Financial Protection Bureau offers an auto loan worksheet that can help you through the process.
  • You can walk away if you feel pressured. We get it — buying a car can be a stressful experience. But that doesn’t mean you should let the salesman push you around. Keep your cool and feel empowered to walk away if you suspect you’re getting a raw deal on financing.