Gen Z and millennials are defaulting on car loans at far higher rates than before the pandemic

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The finances of young Americans may have begun to crumble under the weight of auto loans – yet another worry to contend with in this precarious economic environment.

According to new data from credit reporting agency TransUnion, Gen Z and Millennials now have auto loan default rates significantly higher than their pre-pandemic levels. Generation Z, which includes people born in 1995 and later, has a late payment rate of 2.21%, compared to 1.75% before the pandemic. Millennials, those born between 1980 and 1994, have fallen behind on car loans at a rate of 2.14%, compared to 1.66% before the pandemic.

The data comes against the backdrop of near-unprecedented auto costs. The average new car is now $46,526, just slightly below the record high of $47,000 set in January, according to Kelly Blue Book and its parent company, Cox Automotive.

The Cox Automotive/Moody’s Analytics Vehicle Affordability Index hit its worst mark on record in April, showing the median weeks of income needed to buy the average new vehicle now stands at 40.6 weeks, or nearly a year’s salary, compared to a downward revision. 40.2 weeks in March.

“New vehicle affordability continues to be much worse now than it was a year ago, when prices were significantly lower and incentives were higher,” Cox said in a press release. “The estimated number of weeks of median household income needed to buy the average new vehicle in April increased 18% from last year.”

Amid these challenges, the total volume of auto loans has plummeted. In the last three months of 2021, according to TransUnion, the number of loans granted fell 3% to 6.5 million compared to the same period a year earlier.

This may be satisfactory enough for the Federal Reserve to conclude that financial conditions have tightened as hoped. Meanwhile, TransUnion said creditors appear to be responding to changing conditions by offering various types of forbearance to borrowers.

“Supply shortages have driven up vehicle prices, and the closure of international factories will lead to an increasing shortage of inventory throughout the year,” TransUnion said in a May 23 blog post. “In addition to the increase in vehicle prices, the rise in inflation will also have an impact on the purchasing power of consumers. To help control monthly payments, we anticipate that lenders may offer consumers options such as extended loan terms to offset affordability issues.

Still, auto loan defaults are a sign amid the broader trend of a general rise in the cost of living. Although no generation is immune to this phenomenon, young consumers are the most affected, as they have fewer accumulated assets to act as a buffer.

Indeed, a new survey of Gen Z and Millennials by consulting group Deloitte found that the cost of living was the top overall concern for both groups, ahead of other issues such as climate change. , unemployment, mental health and personal safety.

“Financial anxiety is prevalent among Gen Z and Millennials,” Deloitte noted. “They worry about their day-to-day finances and fear they won’t be able to retire comfortably.”

Deloitte also found that nearly half of both generations were living on paycheck to paycheck and worried about not being able to cover their expenses, with 30% of both groups expressing general financial insecurity.

The consultancy also found that a third of millennials and 43% of Gen Zers have held side jobs in addition to their main job. Meanwhile, 26% of Gen Zers and 31% of Millennials said they weren’t confident they would be able to retire with financial comfort.

It’s possible that these younger generations have stretched their wallets, thanks to an otherwise healthy pay raise they recently received, especially compared to other generations. Data from Bank of America shows that between May 2021 and April 2022, Gen Z and Millennials received wage increases of 19.9% ​​and 11.3%, respectively.

“Some of the increase in Gen Z will simply reflect members of this group entering their careers after education, which inevitably involves significant salary changes,” according to Bank of America. “But it’s worth noting that Millennials seem to be seeing higher net pay increases than Gen X – it’s Gen X where the median salary is the highest, so it looks like Millennials are catching up .”

But the Deloitte survey indicates that the overall financial situation of younger generations is changing.

“Fast forward to 2022 and, unfortunately, economic conditions and quality of life have deteriorated in many parts of the world,” the survey said. “Now, in the third year of the pandemic, we are also facing alarming geopolitical conflicts, extreme weather events, inequality and a sharp rise in inflation. Rather than being a temporary condition, the disruptions seem to be part of the new normal.”

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