Car Repossessions Are Surging: Here Is Why

Tow trucks are staying busy this quarter. Across the country, auto lenders are reclaiming vehicles at rates we have not seen in years. If you are noticing more news about car repossessions, you are not alone. A mix of high prices, soaring interest rates, and stubborn inflation has created a perfect storm for car buyers.

The Raw Numbers Behind the Surge

To understand why repossessions are spiking, we have to look at the data. Fitch Ratings recently reported that the percentage of subprime auto borrowers who are at least 60 days behind on their bills hit 7.3%. This is the highest rate recorded since the 2008 financial crisis.

Subprime borrowers are typically individuals with credit scores below 620. They are usually the first group to feel the pinch when the economy shifts. However, this trend is starting to bleed into prime borrowers as well. Industry trackers like Cox Automotive show that severe default rates are steadily climbing across all credit tiers. Lenders are losing patience, and the grace periods that were common during the pandemic have completely vanished.

The Era of the $1,000 Car Payment

One of the biggest drivers of auto defaults is the sheer size of modern car payments. According to data from Edmunds, the average monthly payment for a new car is hovering around $738. The average payment for a used vehicle sits at $532.

Even more shocking is the number of people who have committed to massive auto debt. Edmunds notes that over 17% of consumers who financed a new car are now paying more than $1,000 every single month. During the supply chain shortages of 2021 and 2022, dealerships routinely added market adjustment fees. Buyers who desperately needed a vehicle were forced to borrow heavily to cover inflated sticker prices. Now, those massive monthly obligations are clashing with everyday living expenses.

The Interest Rate Squeeze

Car prices only tell half the story. The cost to borrow money has fundamentally changed over the past two years. When the Federal Reserve raised interest rates to combat inflation, auto loan rates followed suit immediately.

In 2021, a buyer with excellent credit could secure a 60-month auto loan with an annual percentage rate (APR) around 2% or 3%. Today, the average interest rate for a new car loan is around 7.1%. For used cars, the average rate jumps to a punishing 11.6%. If you have subprime credit, you might be facing rates of 20% or higher.

These higher rates mean a massive portion of a borrower’s monthly payment goes straight toward interest rather than paying down the actual vehicle. When household budgets get tight, high-interest auto loans are often the first debt that goes unpaid.

The Negative Equity Trap

A growing number of drivers are currently “underwater” on their loans. This means they owe the bank more money than the car is actually worth.

Used car values skyrocketed during the pandemic, but they have been steadily falling over the last 18 months. Buyers who bought at the peak of the market are now stuck. Edmunds reported that the average amount of negative equity on vehicle trade-ins recently hit $6,064.

When a borrower owes $6,000 more than their car is worth, they are trapped. They cannot sell the vehicle to get out of the loan because the sale price will not cover the bank payoff. If they lose their job or face a medical emergency, their only option is often to stop making payments and wait for the repo truck.

The Hidden Shock of Auto Insurance

People usually budget for their monthly car payment, but they often forget to budget for aggressive insurance hikes. The Consumer Price Index (CPI) recently showed that auto insurance premiums surged over 22% in a single year.

Major insurers like State Farm, Allstate, and Progressive have raised rates across the board to cover the rising costs of vehicle parts and labor. According to Bankrate, the average cost of full coverage auto insurance is now over $2,300 a year. For a family living paycheck to paycheck, an extra $50 to $100 a month in insurance costs is enough to break the budget and force a missed auto loan payment.

How Lenders Are Responding

Banks and credit unions are highly aware of this growing risk. Major auto lenders like Ally Financial and Capital One have recently increased their financial provisions for credit losses. This means they are actively setting money aside because they expect more loans to go bad.

Because lenders are nervous, they are moving faster to reclaim their assets. In the past, a bank might wait 90 or 120 days before issuing a repossession order. Today, some aggressive lenders are ordering tow trucks the moment an account hits 60 days past due.

Frequently Asked Questions

How many missed payments lead to a repossession? Laws vary by state, but most lenders can legally start the repossession process after a single missed payment. In reality, most traditional banks wait until you are 60 to 90 days past due before sending out a recovery team. Subprime lenders and “buy here, pay here” lots often act much faster.

Can you get your car back after it is repossessed? Yes, but it is expensive. You will typically need to pay all past-due amounts, late fees, and the cost of the towing and storage. Some states require the lender to let you reinstate the loan, while others require you to pay off the entire loan balance to get the car back.

Does a voluntary repossession hurt your credit less? A voluntary repossession (where you hand the keys back to the bank) still leaves a major negative mark on your credit report. It shows future lenders that you did not fulfill the terms of your contract. However, surrendering the vehicle voluntarily can save you the additional towing and recovery fees associated with a forced repossession.