The rise of delinquencies in U.S. auto loans — to their highest level since the global financial crisis — may be the canary in the coal mine for the U.S. consumer, which is facing the prospect of renewed inflation and elevated interest rates.
In a new report, Morningstar DBRS Inc. said that data from the New York Federal Reserve Bank indicated that the delinquency rate for auto loans reached 8.1% in the fourth quarter of 2024, which is up from 5% in the fourth quarter of 2021, and represents its highest mark since the 10.5% rate reached during the financial crisis.
“Rising U.S. auto loan delinquencies are a concern heading into a period of increasing economic uncertainty given ongoing global trade disputes,” it said.
As higher tariffs take effect, “we would expect U.S. economic growth to slow and inflation to increase, potentially leading to a weakening U.S. labour market,” it said.
Persistent inflation is expected to keep interest rates higher for longer, further pressuring household balance sheets, amid rising prices for both new and used vehicles — which results in larger amounts being financed.
DBRS noted that, in the fourth quarter, the average new vehicle financing was up 26% from its pre-pandemic level to just under US$40,000, and the average used car financing was up 28% over the same period.
“These larger loan balances combined with higher interest rates are straining consumers,” it said.
In particular, lower-income, sub-prime borrowers are feeling the pinch, with the delinquency rate for this segment up to 8.9% in the fourth quarter.
“With tariffs potentially leading to higher inflation and a weaker labour market, we would expect credit performance in the subprime category to deteriorate further in coming quarters,” it said.
Indeed, the fact that auto loan delinquencies are already rising signals that households are facing strain heading into a weaker economic environment.
“… the recent rise in delinquencies over the past four quarters despite relatively healthy labor markets is an early sign that certain consumers are under stress from higher cost of living and elevated interest rates on floating consumer debt such as credit cards,” the report said.