But we haven’t reached a perfect storm scenario yet.
If you’ve been noticing an uptick in tow trucks on the roads in your town, you’re not alone. Back in February, Cox Automotive indicated what we already intuitively knew: car repossessions are up, way up. After a sleepy time during the past couple of years, Cox found that nationwide the rate of vehicle repos had increased a whopping 20.4%. The bad news is it looks like this is only the beginning of a trend that continues to grow.
That warning from Cox mostly went unheeded. In early June Cox Automotive revealed that during 2022 car loan defaults and repos returned to historical norms, officially ending the strange time when they dipped significantly. For whatever reason, more news outlets paid attention when Bloomberg ran a piece in April about the increasing repossession rates, acting as if the issue had suddenly popped up.
During the era of covid, repo work was so slow many agents quit and switched to other professions. Government checks were arriving in the mail monthly, providing some consumers with more spending money than they ever had in their life, meaning few were missing car payments. In fact, plenty of people were able to afford a better car than they ever imagined.
But that government gravy train ride has long ended as the cold, stark reality of poor financial decisions made during the pandemic begin piling up. With the extra government cash, combined with the pervasive feeling that each week could be a person’s last, many consumers went for that dream vehicle which before was completely out of reach. Now those same people are struggling to make payments on their BMW, Mercedes, or other luxury vehicle. Reality can be a cruel teacher.
With the covid era also came shortages of new cars, thanks to manufacturing kinks as the entire world grappled with the uncertainty and government-imposed restrictions. That put pressure on both new and used vehicle prices, something we’re still dealing with. While prices are falling across the market, quite a few people bought when they were sky-high, meaning they’re enduring high monthly payments still.
At the same time, inflation has pushed the cost of many necessities up in the past two years, creating for some the perfect financial storm. With little in the way of savings, consumers are having to make the tough choice about which payments to let go. An obvious solution would be to off-load the car with sky-high payments, freeing up much-needed cash. But the problem is they can’t get out from under the loan since they’re already upside down and values are dropping. Many are making the hard choice to just stop paying and use a cheaper form of transportation, fueling in part the wave of repos.
Interest rates have played their role in this storm. As rates have climbed, new borrowers see their monthly payments also increase. Cox found that in February the average monthly payment for new car owners was a shocking $762. Sadly, that was after a decrease from the peak $791 averaged in December 2022. Plenty of consumers feel their monthly car bill will bust their budget yet, if that hasn’t already happened. The poor choices come with consequences.
There’s yet another thing fueling predictions of a growing wave of car repossessions: a predicted tidal wave of layoffs. We’ve seen some layoffs from big companies here and there since 2022, but some economists are predicting far more on the horizon.
Back in April, NBC News dared utter the “R word” when talking about the increase in car repos. That’s right, the corporate news agency said the anticipated recession could further complicate Americans’ tenuous financial situation, triggering an even bigger wave of vehicle loan defaults.
NBC News dutifully repeated what’s expected is a “mild recession” later in 2023, but not everyone believes the dip will be so tame. We’ll just have to see how low things go and for how long, but it’s undoubtedly true the worse the recession, the more common car repos will become.
Wells Fargo Auto has been offering repossession agencies an extra $500 per vehicle to incentivize them to go after delinquent customers. According to a report from Auto Finance News, this move was made in response to a shortage of repo agents nationwide coupled with the rise in payment delinquencies. We wonder if this isn’t an effort by the lender to stay abreast of the growing upswing it fears will accelerate as the year progresses.
We can’t find any information about other lenders offering a bounty for vehicle repossessed. That doesn’t mean they won’t follow suit, especially if Wells Fargo finds success with this approach and everyone scrambles to keep up with a heavy, steady flow of repossessed cars as bad personal financial decisions combined with a struggling economy spell trouble.
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