Could America buckle under the weight of crippling auto debt?

Outstanding car loan debt in the U.S. hit a record $1.5 trillion, according to the NY Fed. That’s almost equivalent to the entire GDP of Brazil and is already costing many motorists more than $1000 per month.

More than 100 million people currently have outstanding car loans, the NY Fed added.

Affordability comes into question

There’s a number of reasons behind the surge in auto loans, but it’s mainly because cars have gotten very expensive. For many Americans, they are becoming unaffordable.

Adding to the higher cost of driving a car off the lot are supply chain issues that affect the availability of chips and delivery of new vehicles. Not to mention the highest interest rates in over 20-years.

According to Experian, the average amount financed on a new car was $40,851 in Q1. That’s a huge jump from $35,383 in the past two years.

The typical monthly auto loan payment is now $725 compared to $650 last year, and $577 in 2021.

But these are just average costs and many people are seeing a much bigger monthly squeeze. Last year, auto price guide Edmunds said 12.7% of consumers with car loans were already paying over $1000. That’s compared with 7.3% in the previous year.

Delinquencies pass pre-Covid level

With so much talk of recession this year, there is concern the weight of borrowing costs on already stretched households could drag the economy down.

Auto loan delinquencies have recently surpassed pre-Covid levels, touching 7.3% in Q2, up from 6.9% in Q1, according to a report from Moody’s.

The S&P/Experian Auto Default Index also shows defaults have climbed steadily over the past three years. From a low of 0.3 in June 2021, the index hit 0.82 last month. And it’s now approaching the pre-pandemic norm of 1.0 again.

In February, Cox Automotive said the severe delinquency rate on auto loans was the highest they’ve seen since they began tracking the series in 2006. Defaults, however, are still below 2019 levels.

Younger Americans bearing the brunt

The “growing auto loan problem” has also attracted the attention of the World Economic Forum, which called it a crisis for America, with significant debt taken on since the pandemic.

And just as Gen-Y and Gen-Z have been priced out of the housing market, the WEF says the same is happening with cars.

Americans under the age of 40 have increased their vehicle-related debt the most, the report said. Their average auto loan was up 41% since 2019 at $24,000.

One in five Gen-Zs also said they spend more than 20% of their after-tax income on car payments.

The report showed throughout 2022, $20 billion of Gen Z and Millennial auto debt has fallen into serious delinquency, with inflation a major factor behind this.

So while retail sales and low unemployment offer hope, depleting savings and record debt levels serve as a sobering reminder that the economy isn’t out of the woods.