(NewsNation) — Americans are falling behind on their car payments at the highest rate in years, leading some to worry that an auto loan bubble is about to burst.
Auto loan debt recently surpassed student loans as the second-largest consumer debt category in the U.S., trailing only mortgages. Americans owed a record $1.66 trillion in auto loan debt at the end of 2024, up 20% since 2020, according to the Federal Reserve Bank of New York.
“Do I see a bubble of auto loans and then a bursting of the bubble? I would say yes, that delinquencies are going to get worse,” said Pamela Foohey, a law professor at the University of Georgia who specializes in bankruptcy and consumer law.
Auto loan bubble fears in 2020
Foohey warned of an auto loan bubble in 2020 and she still foresees a “reset in the auto loan market” to take into account what people can actually afford to finance their cars.
The heightened concern comes after pandemic-era supply chain issues pushed new and used car prices to record highs. At the same time, automakers were prioritizing higher-end models at the expense of more affordable options. Those who needed a car had few budget-friendly choices.
“Consumers are stuck in this situation where the smaller, cheaper vehicles that they could find maybe seven, eight years ago just don’t even exist anymore,” said Joseph Yoon, consumer insights analyst at Edmunds, an auto data provider.
New car shoppers are taking out larger loans than ever, financing an average of $42,113 last quarter, nearly $10,000 more compared to the end of 2019, according to Edmunds. Interest rates are also higher, meaning that borrowing comes at a higher cost than it used to.
Now, more Americans are struggling to keep up with their payments.
Delinquency rates among subprime auto borrowers (those with lower credit scores) recently hit the highest level in decades. More prime borrowers have also fallen behind.
Here’s what to know about a possible auto loan bubble and what it could look like.
Is there a car loan crisis?
Last quarter, nearly one in five new car shoppers committed to a monthly payment of $1,000 or more, a record share, according to Edmunds.
The average monthly payment on a new car loan has risen by roughly a third since the pandemic — from $570 in 2019 to $754 at the end of 2024. The uptick occurred as supply chain disruptions cut new-vehicle production and sent car prices soaring.
Faced with lower inventory, those who needed to buy a car were left with few affordable options and many took on larger, potentially unsustainable loans.
“Now people are finding themselves in a situation where not only did they pay over sticker for their vehicle maybe two, three years ago, they did so with record high interest rates and record high purchase prices,” Yoon said.
Instead of paying off the loans they already have, many consumers are rolling their negative equity into new car loans, creating an expensive cycle of debt.
Last quarter, nearly one in four consumers (24.9%) who traded in a vehicle for a new one were underwater on their prior loan, up from 14.9% in 2021, Edmunds data shows.
The share of trade-ins with negative equity is still lower than in 2019, but the average amount owed on upside-down loans is at an all-time high of $6,838. Worse yet, 1 in 4 consumers with negative equity owed more than $10,000 on their auto loans, Edmunds found.
While upside-down loans can leave borrowers vulnerable, missed payments are a surefire sign of financial strain.
Car repossessions have climbed: Cox Automotive
The share of subprime auto borrowers at least 60 days past due on their loans hit a record high 6.56% in January, according to Fitch Ratings. That’s the most since the agency began collecting the data in 1994.
Higher risk borrowers aren’t the only ones struggling to keep up. Data from the New York Fed shows nearly all borrower groups have seen delinquency rates rise beyond their pre-pandemic levels.
In the fourth quarter of 2024, the share of auto loans among all borrowers that transitioned into serious delinquency — 90 days or more past due — rose to 2.96%, the highest level since 2010.
Car repossessions have also climbed, up 16% in 2024 compared to a year earlier and 10% higher than 2019 pre-pandemic levels, according to Cox Automotive.
Is a car loan bubble like a housing bubble?
A surge in auto loan defaults would hurt lenders and consumers, but that doesn’t mean it would trigger a major financial meltdown like the 2008 housing crash.
First, auto loans are a much smaller market than mortgages. Total auto loan debt in the U.S. was $1.66 trillion at the end of 2024, while mortgage balances totaled $12.61 trillion.
In that sense, an auto loan bubble burst is less likely to send a significant shockwave through the entire financial system.
Another reason that’s unlikely is due to the fundamental difference between cars and homes. The 2008 housing crisis was fueled by the belief that home values would continue to rise, which encouraged reckless lending and speculation.
Cars, on the other hand, are well-known depreciating assets. Most people don’t expect their car to go up in value after driving it off the lot. Lenders understand this and account for it when issuing loans.
“We’ve been talking about defaults now for five plus years, so [bankers] understand the riskiness,” Foohey said.
Another point to keep in mind: it’s easier to repossess a car than it is to foreclose a home, meaning auto lenders are better positioned to recover their assets in the event of a downturn.
Share of low-risk borrowers has improved in recent years: Experian
Technological advances have also helped mitigate risk, according to Melinda Zabritski, head of automotive financial insights at Experian.
“There’s so much more analytics and data available to lenders today to help manage their portfolios and make the best decisions possible,” she said.
And unlike what happened during the Great Recession, which was largely unexpected, lenders have been preparing for delinquencies to rise, Zabritski said.
Experian data shows the share of low-risk borrowers has also improved in recent years.
So-called “super prime” borrowers with the highest credit scores accounted for nearly a third of all loans last quarter. Meanwhile, subprime borrowers made up less than 16%, down from about 22% at the end of 2019.
“The automotive industry is extremely resilient, as is auto financing,” Zabritski said. “And unlike what you see a lot in mortgage, in the car space, consumers have a lot of options.”
What happens if there is a car loan bubble?
An auto loan bubble may not set off a full-blown financial crisis, but it could still have significant consequences for the millions of Americans who depend on their cars.
“People in this country need cars to get to work, get their kids to daycare, healthcare, to school,” Foohey said. “The market bursting for people could have temporary, severe effects.”
More than 75% of American commuters use their car to get to work, and nearly half have no access to public transportation.
Foohey said people who file for bankruptcy own cars at the same rate as people who don’t file for bankruptcy. Why?
“Because you can live in your car and still go to work, but you can’t drive your house to work,” she said.
Others, like Nicole Gelinas at the Manhattan Institute, have pointed out that rising car debt could hurt the economy in other ways.
“People could also cut back on other consumer spending, such as restaurant meals, to keep up with their existing car payments, thus further harming the economy,” Gelinas wrote in 2023.
But the increase in auto delinquencies hasn’t scared off investors yet. Sales of bonds backed by the riskiest auto loans to subprime borrowers were at nearly $40 billion as of last October, up 17% from all of 2023, the Wall Street Journal reported in November, citing data from JPMorgan Chase.
Since then, President Donald Trump’s trade war has set off a wave of economic uncertainty, particularly for automakers. Some major banks have already raised their recession odds.
For those who are in the market for a car right now, Yoon said families should assess what their actual needs are.
“It’s gotten to a point where the average consumer may be completely priced out of the new car market,” he said.