Recent data regarding consumer credit--especially auto ABS collateral data--are showing signs of deteriorating performance. Moreover, we've seen some indication that consumer distress is spreading to higher credit score and income cohorts, despite a relatively low unemployment rate. We attribute this to a combination of higher interest rates, higher debt levels, inflation/affordability issues, and the resumption of student loan payments. An unforeseen increase in the unemployment rate over our base case (4.2%-4.4% through year-end 2026) could lead to further distress for consumers who are already facing a myriad of financial challenges.

Car Payments, Auto Loan Delinquencies Rising

The average payment for a financed new vehicle was approximately $703 in calendar year 2024, up from $529 in 2019, per S&P Global Mobility data. Similarly, the average payment for a used vehicle was up from just under $400 in third-quarter 2019 to about $520 as of third-quarter 2024, according to Experian. Adding to the increasing burden of monthly payments are rising insurance premiums. According to the Bureau of Labor Statistics, auto insurance costs rose an average of 18% in 2024 following a 17% increase in 2023 (see chart 1). Auto loan interest rates and overall consumer prices (CPI-U) have risen as well.

Chart 1

Higher Debt Levels

Higher debt levels have started to weigh on a growing number of consumers. Credit card balances (revolving debt in chart 2) increased to a record $1.38 trillion (non-seasonally adjusted) as of the end of 2024. Meanwhile, accounts with 60% or higher utilization rates are transitioning to delinquency status at rates that surpass pre-pandemic levels, according to Liberty Street Economics' May 14, 2024, edition. In addition to higher unsecured debt levels, we are also seeing greater use of buy-now, pay-later (BNPL) arrangements, especially among younger consumers with low credit scores. The risk is that, unlike credit cards, BNPL obligations are generally not reported on credit bureau reports, thus giving lenders an unclear picture of these consumers' overall debt levels. Chart 2 shows the overall amount of consumer credit outstanding from 2006 to 2024, separated into its various components.

Chart 2

The resumption of government student loan payments poses another obstacle for consumers. In October 2023, after four years of forbearance, an estimated 24 million borrowers with federal student loan payments suspended at the onset of the COVID-19 pandemic were required to resume payments, which average approximately $300 per month. Many of these consumers may not have budgeted for the resumption of their student loan payments, and may have even taken on additional debt, hoping their student loans would eventually be forgiven given the various proposals under the prior administration.

It therefore comes as no surprise that auto loan ABS collateral performance weakened in 2024. Prime 60-plus-day delinquencies and losses reached their highest monthly averages since 2010, and the 2023 and quarterly 2024 vintages are reporting higher losses than 2022 and 2016 (the last vintage unaffected by COVID-19 stimulus). Meanwhile, subprime 60-plus-day delinquencies reached an all-time high, and the average monthly losses have climbed to near the high last seen in 2009, despite lenders' tighter credit standards, which are finally surfacing in 2023 and 2024 vintage static pool data (see "U.S. Auto Loan ABS Tracker: Full-Year and December 2024 Performance," published Feb. 13, 2025).

It's worth noting that 19% annual growth in auto loan originations in 2021 and subsequent 2% growth in 2022 brought the figure to the highest levels in history, according to the October 2024 Quarterly Report on Household Debt and Credit from the New York Federal Reserve Bank. This growth was the result of lenders relaxing the tighter credit policies they had implemented during the pandemic and has contributed to weakening auto loan performance.

Higher Income/Credit Score Borrowers Starting to Feel the Pinch

As the stress builds, credit performance is beginning to show weakness. In the case of auto loan performance, for example, the lower-income quartile and subprime (credit score below 620) cohorts are clearly exhibiting increases in 30-plus day delinquencies. But the strain is not confined to that vulnerable segment: 30-plus day delinquencies are increasing in the near-prime and second- and third-income quartiles, and borrowers with higher incomes and credit scores are showing signs of weakening performance. Charts 3 and 4 (from Liberty Street Economics) illustrate this trend.

Chart 3

Chart 4

Higher Unemployment Could Have an Outsized Impact

Although real wage growth has been positive for the past two years (after two years in negative territory), consumers are struggling with vehicle affordability. Persistent inflation, high home prices, elevated interest rates, and student loan debt are contributing to deteriorating loan performance. Another cause of rising delinquencies is the increase in costs associated with owning a car. Since 2019, the average new and used vehicle loan payment has gone up by about one-third, according to S&P Global Mobility and Experian, while the cost of insuring a car has increased about 50% since 2019, according to the Bureau of Labor Statistics.

Unemployment currently sits at 4.1%, which is low by historical standards, but delinquencies are on the rise across credit and income groups. Moreover, proposed tariffs on U.S. imports from Canada and Mexico could increase auto manufacturing costs, in turn putting upward pressure on the already high cost of purchasing a new vehicle. We therefore expect that even minor increases from these relatively low levels (consistent with our baseline forecast) could have an outsized impact on auto ABS collateral performance.