The $1.7 trln auto loan market heads for a crash

General Motors

12/10/2026 15:44

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Stephen Gandel
NEW YORK, Oct 13 (Reuters Breakingviews) - The US commute is becoming an antique roadshow. Squeezed by high vehicle prices and borrowing costs, drivers are buying older cars with loans that last as long as eight years. The tactic lowers monthly payments, but leaves households stuck in debt on autos that are both costlier to maintain and harder to resell. The market looks to be heading for a breakdown — one that could affect one of Wall Street's largest securitization markets.
As with every other economic trend, these symptoms accelerated during the pandemic. Supply shortages and $5 trillion in economic stimulus sent car prices soaring, hitting $50,089 in September, up from $38,550 in February 2020, according to data from Kelley Blue Book. Detroit-based giants General Motors GM.N and Ford Motor F.N recorded billions of dollars of benefit to their bottom lines from charging more for new Cadillacs and F-150 trucks. Used cars prices are off their peak, but are still nearly 30% higher than they were in December 2019, according to the US Bureau of Labor Statistics.
Car buyers have simply taken on more debt and higher repayments to cope. As of the middle of this year, the average payment on US auto loans for new cars has risen to $765 a month, up from $550 in the middle of 2019, according to Experian.
It might seem mysterious that underwriters haven’t backed off such aggressive lending. Credit scores are partly to blame. Pandemic-era government assistance, along with student-debt holidays and foreclosure moratoriums, briefly improved many households’ budgets. In turn, the median consumer’s credit score jumped 20% to 676 from the first quarter of 2020 to the first quarter of 2022, scoring agency TransUnion found. When COVID-era spending ended, though, this improvement proved to be a mirage. Auto loans that were made in 2021 and 2022 ended up in arrears at much higher rates than historical averages, according to TransUnion.
More broadly, strain is showing in higher payment-to-income ratios, which had long hovered around 10% but rose to nearly 12% by early 2022 for borrowers with weaker, “subprime” credit scores, according to data platform LoanTape.
In the United States, buyers are typically matched with loans at the dealership. Banks set interest rates; manufacturers, prices. A salesperson seeking to lower a prospective customer’s monthly loan payment can only do a few things, chiefly: steer them to an older, cheaper model; or to a loan with a longer repayment period. After all, a loan can appear affordable if principal payback is stretched over enough years. The car against which it is secured, however, is only getting older — and presumably less valuable — during the life of the credit.
In the second quarter of this year, the average car purchased for between $15,000 and $20,000 was 6 years old, up from a bit over 3 years old in the middle of 2019, industry watcher Edmunds reckons. Over the same time, loan lengths for used cars have grown to an average of 67.9 months, up from 64.7 months, according to Experian. This has an effect on trade-ins and upgrades, which remain essential to the dealership model. Salespeople want more add-ons, and a big chunk of buyers use the value of their old vehicle to contribute towards the purchase of a new one. Upgrade options added to a loan balance and an older, depreciated car can lead to negative equity, or owing more than an auto is worth. Even if this is the case, borrowers can often roll an over-stretched balance into new borrowings when they trade in.
As a result, used car buyers with negative equity in 2026 had borrowed on average $5,114 more than what their car was worth, up from $3,774 at the beginning of 2020, per Edmunds. For new car buyers, the figure has risen to $7,023 from $5,483 over the same period.
Subprime borrowers are driving off the lot with an even bigger financial millstone in tow. More than 30% of loans to such customers originated in the first half of this year are not scheduled to be paid off until their cars are more than 12 years old. That’s up from just 7% at the end of 2019.
This is of enormous concern not just to ordinary US consumers, for whom auto loans are the second-largest category of borrowing behind mortgages, pegged by the Federal Reserve at $1.7 trillion. It is also a problem for the asset managers, insurers and pension funds who invest in this debt after it has been carved up into asset-backed securities. Fitch Ratings’ measure of the share of subprime loans backing such ABS deals that are 60 days or more past due has risen to historic highs, now hovering around 6%. This is a colossal market, with $127 billion of securitized issuance last year, according to S&P Global Intelligence. 
It is now tying big money managers to an industry bet that cars can continue to support more debt for longer. And when it comes to older vehicles, the metrics that lenders use to approve borrowers fail to really capture monthly auto expenses because of rising maintenance costs. Borrowers struggling with repairs have little incentive to keep paying loans on cars that no longer run reliably. The danger for lenders and asset managers and insurance companies, and the retirees and policy holders they represent, is not simply that consumers cannot afford the payments. It is that the collateral backing those loans may be wearing out before the debt does. That's a problem no extension of loan terms can solve.
     
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(Editing by Jonathan Guilford; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))