November 29, 2023

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This Is Why Gen Z And Millennial Car Loan Default Rates Are Skyrocketing

The economy is currently in a critical state, despite the efforts of the current administration to downplay it. In July, severe mortgage delinquencies increased 55 percent over pre-pandemic levels. Meanwhile, foreclosures grew 12 percent in August from July 2022 and increased 187 percent from 2021, according to data from ATTOM. To make matters worse, foreclosure filings have continued to rise each month since this summer. Additionally, 32 percent of American consumers are having trouble paying their bills. Furthermore, the growth in real average hourly earning isn’t keeping up with inflation, pushing households to borrow more.

The Daily Mail points out that US household debt jumped to $16.5 trillion in the third quarter. This represents an 8.3 percent growth, which is the fastest rise since 2008. “Soaring inflation has pushed many Americans to tap lines of credit as they struggle to afford high car prices, more expensive homes and elevated gasoline prices, the report noted,” says the Daily Mail.

It goes without saying that this severe economic condition is pushing many Americans to default on their loans, which again has dire repercussions for both the borrower and the economy. Young adults are especially vulnerable to risky loan defaults.

Now more than ever, young adults are defaulting on auto loans at an alarming rate,” says Automoblog. The digital publication points toward an NBC News article, which highlights that “Gen Z and millennials default on auto loans at far greater rates than before the pandemic.” According to NBC News, TransUnion data shows that these two demographic groups currently have auto loan default rates that are much higher than their pre-pandemic levels.

“Gen Z, which includes those born in 1995 and after, has a past-due rate of 2.21 percent, compared with 1.75 percent before the pandemic. Millennials, those born between 1980 and 1994, have fallen behind on car loans at a rate of 2.14 percent, compared with 1.66 percent before the pandemic,” says NBC News.

Related: 10 Things To Know About Financing A Car (And When It’s Actually A Good Idea)

This Is Why Gen Z And Millennial Car Loan Default Rates Are Skyrocketing

All-New 2023 Toyota Crown Family Of Four New Cars
Via: Toyota 

This is hardly a secret, but new cars are becoming less affordable because of inflation, supply chain issues and the ongoing chip shortage. In this context, the average new car price climbed to $46,526 in January 2022, according to Kelley Blue Book and its parent company, Cox Automotive.

Meanwhile, the Cox Automotive/Analytics Moody’s Vehicle Affordability Index revealed April marked the worst month on record for this metric. According to the index, the median number of weeks of income needed to purchase the average new vehicle stood at 40.6 weeks, which is roughly a year’s worth of pay.

“New-vehicle affordability continues to be much worse now than it was a year ago, when prices were notably lower and incentives were higher,” Cox added in a news release, according to NBC News. “The estimated number of weeks of median household income necessary to purchase the average new vehicle in April was up 18 percent from last year.”

As a result of having to pay more for their new cars, young consumers are now more susceptible to financial hardships and missed payments. This implies that a record number of Gen Z and millennial automobile owners are struggling to make their loan payments and are being forced to go into default.

Related: 10 Tips For Buying A Car If You Have Bad Credit

What Can You Do If Your Loan Is In Default

Oversimplified, defaulting on a loan indicates that you have ceased making car payments or missed a payment. Usually, if you miss a payment on your car loan, financial experts deem your loan in default. However, the terms vary from contract to contract, so you must study the small print before committing to anything. And while you may think the story ends with the dealership repossessing the vehicle, the issue is far more complex than this. First, defaulting on a loan will impact negatively your credit score. The activity will therefore have an effect on your financial health. Second, in addition to losing the car you had been paying for up until recently and getting a low credit score, you might also have to pay the lender more money to cover the remaining balance of your loan.

To make matters worse, the deficiency balance might have grown unexpectedly in recent months as new and used car prices have skyrocketed. And there could be even legal troubles ahead if the dealership sells the debt to a collection agency, who will sue you for the remaining amount. Accordingly, in addition to paying for all other expenses, you will also need to pay the attorney who defends you. Young borrowers should, of course, look into refinancing options for their auto loans or ask family members for assistance with payments.

Sources: ATTOM, Daily Mail, Automoblog, Kelley Blue Book, Cox Automotive