Young auto borrowers falling further behind

Younger generations’ financial issues stem from the pandemic when stimulus payments and debt forbearance programs improved credit scores, data journalist Harry Hoenig said.

Generation Z and millennial borrowers are falling significantly behind on their car payments at rates last seen during the financial crisis of 2008 and 2009, according to an analysis of Federal Reserve data by car insurance comparison site Jerry.

And that’s during a time when they didn’t have to make their federal student loan payments — a budget burden that could ding millions of borrowers’ credit, the alternative credit score provider VantageScore notes.

The Federal Reserve’s quarterly household debt report, which draws on Equifax data to produce its auto loan delinquency results, breaks out borrowers into age ranges including those 18 to 29 and 30 to 39 years. These brackets capture what the Pew Research Center had previously defined as older Gen Zers (the generation starting with 1997 births) and nearly all millennials (those born in 1981 to 1996), though the organization in May said it would reduce its use of generational labels.

Those age demographics historically have been more severely delinquent than the national average, according to the Fed’s study, which contains results from 2000 to the first quarter of 2023.

On average, 3.58 percent of 18- to 29-year-olds and 2.62 percent of the 30- to 39-year-old population have been late on their auto loans by 90 days or more during that time, compared with 2.13 percent of all borrowers. But the spread between those younger groups’ delinquency rates and the national average has been elevated.

The 4.55 percent 90-day delinquency rate among 18- to 29-year-olds in the first quarter of 2023 was the highest since the fourth quarter of 2009, and the 3.06 percent rate among 30- to 39-year-olds was the worst since the third quarter of 2010. The Fed’s figures are four-quarter rolling averages.

“Delinquencies are also rising at a blistering pace,” Jerry data journalist Henry Hoenig wrote in the June 2 Jerry report. He called the growth from the first quarter of 2022 to the first quarter of 2023 the sharpest of any 12-month period in the Fed’s more than 23-year data set. The increase seen in the first quarter of 2023 among those ages 30 to 39 was the highest year-over-year bump since 2007, Hoenig said.

Customers’ struggles to pay bills can erode future dealership business.

“The surge in delinquencies coincides, perhaps not surprisingly, with a steep drop in new auto loans, particularly among borrowers with lower credit scores,” Hoenig wrote.

The amount borrowed for vehicles in the first quarter by consumers ages 18 to 29 fell 25 percent from the fourth quarter of 2022, the largest quarter-over-quarter decline found in the Fed’s data, according to Hoenig’s analysis. Borrowing dropped 17 percent quarter over quarter among the 30 to 39 age cohort, and 18 percent among those ages 40 to 49. But he also noted that tightening by lenders also could have cut into the amount of money borrowed for vehicles.

Hoenig told Automotive News in June that younger generations’ financial issues stemmed from the COVID-19 pandemic in 2020. The initiation of stimulus payments and debt forbearance programs — particularly with student loans — improved consumer credit scores, he said. Consumers were able to borrow more for vehicles than would previously have been possible.

“I think younger generations, particularly Gen Z, went on a kind of car-buying binge,” Hoenig said.

From the end of the second quarter of 2020 to the end of 2022, consumers younger than 40 committed to the largest dollar amount of fresh auto debt of any 10-quarter period in the Fed’s records, Hoenig wrote in a different Jerry report.

It helped swell the amount collectively owed on vehicles by borrowers ages 18 to 29 by 31 percent between the second quarter of 2022 to the end of 2022, while outstanding auto debt among those ages 30 to 39 rose 29 percent. These were the largest balance increases during that time among any of the age groups studied by the Fed.

But the rising cost of car ownership has left younger borrowers struggling to cover car payments as well as manage other debt, he said, adding that he thinks “they overextended themselves as young people tend to do.”

Hoenig said he lacked data but agreed with the idea these delinquencies would affect which vehicles borrowers purchased down the road.

“It seems logical,” Hoenig said.

A customer who defaults will flounder and likely need to buy a lower-priced vehicle, he said.

“You may struggle to get credit at all because lenders are tightening their standards already,” he said.

Younger borrowers could have an even harder time obtaining auto loans and paying their bills with the impending resumption of regular student loan payments.

The COVID-inspired federal student loan forbearance program stops at the end of August, and those who borrowed must resume payments around October, according to VantageScore. According to U.S. Department of Education statistics cited by the alternative credit score provider, nearly $1.3 trillion of federal student loan debt had been put on hold as of December 2022.

And borrowers counting on a bailout might have lost that option as well after the Supreme Court’s  ruling in Biden v. Nebraska last month. A 6-3 court held June 30 that the secretary of education lacked the authority to erase $10,000 to $20,000 in student loan debt for tens of millions of eligible borrowers.

That same day, VantageScore predicted 34 to 76 percent of 40 million borrowers with student loan stays might miss their first student loan payment once the forbearance period ends. Doing so would mean a 49- to 82-point hit to their credit scores, VantageScore estimated.

“Based on prior loan payment behavior, we know a significant percentage of student loan borrowers will struggle with making payments when the forbearance ends and this likely will be exacerbated by today’s Supreme Court decision,” said Andrada Pacheco, VantageScore senior vice president of data science and modeling. “An additional concern is that the restart of student loan payments may impact delinquency rates for other loan products, particularly for borrowers who increased other forms of debt while the pause was in effect. It’s important for these borrowers to clearly understand their debt obligations and know how missed payments can impact their overall credit score.”