Auto Loan Delinquencies Climb as Used Car Values Slide

When the Car Is Worth Less Than the Loan

Auto loan delinquencies are rising at a pace that has caught lenders off guard, and the timing could not be worse: used car prices, after years of artificial inflation, are falling sharply – leaving a growing number of borrowers underwater on vehicles that are losing value faster than they can make payments.

How the Market Got Here

During the supply chain disruptions of the early 2020s, used car prices spiked to historic highs. A shortage of new vehicles pushed buyers into the used market, and demand far outpaced inventory. Dealers were selling three-year-old sedans at prices that rivaled new ones. Lenders, eager to capitalize on the boom, extended credit aggressively – often at loan-to-value ratios that assumed prices would hold.

They did not hold. As new vehicle production normalized and interest rates climbed, used car prices began a correction that has continued into 2025. Wholesale auction values have dropped considerably from their peak, and retail prices are following. A borrower who financed a used SUV at peak pricing may now owe significantly more than the vehicle is worth on the open market. That gap – negative equity – is the central problem driving the delinquency trend.

The issue is compounded by the interest rate environment. Many of the auto loans originated between 2021 and 2023 carried rates that were already elevated by historical standards. When the Federal Reserve began its rate hiking cycle, buyers who had stretched their budgets to afford payments at higher interest rates left little room for financial shock. A medical bill, a job loss, or even a modest income disruption is enough to tip a borrower into missing payments.

Subprime borrowers are taking the hardest hit, but the stress is not limited to the lowest credit tiers. Near-prime borrowers – those with credit scores in the 620 to 680 range – are showing delinquency rates that would have been considered elevated even against pre-2020 benchmarks. This broadening of credit stress suggests the problem is structural, not just a low-income phenomenon.

Lenders Caught Between Recovery and Loss

When a borrower defaults on an auto loan, the lender’s recovery depends almost entirely on what the repossessed vehicle sells for at auction. That calculation is getting worse by the month. Lenders who repossess a vehicle now face a market where auction prices are soft, inventory of used cars is rising, and buyer demand has cooled under the weight of high financing costs. The recovery rate on defaulted auto loans – the percentage of the outstanding balance a lender recoups after repossession – has been shrinking.

This creates a feedback loop that pressures lenders to tighten credit standards, which in turn reduces access to auto financing for lower-income buyers. Some credit unions and regional banks have already begun pulling back from deep subprime originations. Larger auto lenders are increasing their loss reserves, a signal that internal models are projecting higher charge-off rates in the months ahead. Those reserve builds directly reduce reported earnings, and investors in auto lender stocks have noticed.

Securitization markets are feeling the strain too. Auto loan asset-backed securities, which package large pools of individual loans into tradable instruments, have seen credit rating agencies flag increased delinquency trends in recent surveillance reports. While the market has not seized up the way mortgage-backed securities did in 2008, the direction of the data is prompting scrutiny from bond investors who had treated auto ABS as relatively safe income products.

Dealerships are caught in the middle. A buyer who is underwater on a current vehicle cannot simply trade it in without rolling the negative equity into a new loan – a practice that deepens the debt burden and increases the probability of future default. Some dealers are seeing trade-in negotiations collapse entirely when buyers realize how far underwater they are. New car sales do not benefit when used car values are falling, because trade-in equity is one of the primary down payment sources in the American auto market.

The geographic concentration of the stress matters. States with large populations of shift workers, gig economy participants, and hourly wage earners – including parts of the South and Midwest – are showing higher delinquency clusters. These are also regions where car ownership is not optional. Public transit alternatives are limited, so borrowers in distress cannot simply walk away from a vehicle payment the way a city dweller might reduce transportation costs by switching to transit.

What Borrowers Are Actually Facing

For individual borrowers, the situation is a financial trap with few clean exits. Selling a vehicle when you owe more than it is worth requires bringing cash to the transaction – money most distressed borrowers do not have. Refinancing is difficult when the loan-to-value ratio is inverted and credit scores have already taken hits from missed payments. Voluntary repossession, while it protects against some of the legal costs of forced repossession, still results in a deficiency balance – the amount the lender cannot recover from auction proceeds – which can follow a borrower for years.

The broader economic weight of rising auto delinquencies feeds directly into consumer credit health nationwide. Auto loans are the third-largest category of household debt in the United States, behind mortgages and student loans. When auto loan stress rises, it tends to reduce discretionary spending, as borrowers prioritize keeping the car over other purchases. A household that is one missed payment away from losing its primary transportation is not buying appliances, booking vacations, or opening new credit cards – and that pullback, multiplied across millions of borrowers, registers in consumer spending data well before it appears in official delinquency statistics.