The chickens are coming home to roost on the 2021-2022 automotive buying frenzy. During that period, supply shortages drove new and used vehicle prices to historically elevated levels, and a significant number of buyers — conditioned by low interest rates and the fear of missing out — took on loans they probably shouldn’t have for vehicles that were overpriced relative to any historical benchmark. The rising interest rate environment of 2022 and 2023 has dramatically changed the math, and the delinquency data is starting to show the consequences.
The mechanics of the problem are straightforward. A buyer who financed a used truck at $45,000 in early 2022 — a price that would have bought a nicer truck in 2019 — at 4% interest over 72 months has a manageable if expensive payment. That same buyer refinancing or rolling that loan in 2023 at 8% or more is looking at a meaningfully higher monthly obligation. And if the truck has since depreciated (as vehicles inflated by the pandemic bubble are starting to do), the loan balance may exceed the vehicle’s current market value — negative equity that traps the buyer in the vehicle or creates a loss if they need to sell or trade.
Auto loan delinquency rates were beginning to tick up in early 2023, particularly in subprime lending categories. Lenders who extended credit aggressively during the buying frenzy — often at elevated loan-to-value ratios on already-expensive vehicles — are starting to see the quality of those portfolios deteriorate. This is not 2008-level financial crisis territory, but it is a meaningful stress on household finances for a segment of the market that stretched to buy during the overheated period.
For buyers currently shopping, the lesson being painfully demonstrated by this cohort is to separate the emotional and social pressure to buy from the financial analysis of whether the purchase makes sense. During 2021-2022, the market created enormous pressure to act quickly and pay whatever was asked. The people who resisted that pressure and waited are now shopping in a better environment with more inventory, more competition, and seller incentives returning to some segments.
The cautionary tale isn’t complicated: cars depreciate, interest rates change, and overextending on a depreciating asset bought at peak pricing is a combination that doesn’t end well. The auto market conditioned too many buyers to ignore that basic math during the frenzy, and the data is now reflecting the consequences.
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