Millennials and Gen Z auto loan default article highlights:
- Gen Z and Millennial auto loan holders have higher default rates than the national average
- Higher default rates could be related to the wealth gap and/or poor credit history which causes them to borrow at high interest rates
- There are ways to avoid defaulting on your car loan and even get your car back if the financial institution repossesses it.
Let’s face it: without financing, that is, without loans, most of us could not afford to buy cars. This was the case even before the prices of new and used vehicles skyrocketed. But even though just getting a loan is stressful enough, it’s nothing compared to paying it back. And that’s assuming you can repay it at all. To some, that sounds like a reasonable assumption. Yet, according to a new report, this is not a given for many Gen Z and Millennial auto loan holders, as they are defaulting en masse.
Millennials and Gen Z are missing out on their car loans the most
You may not be familiar with Cox Automotive, but you are probably familiar with some of its brands. The company has, among other things, Kelley’s Blue Book and Autotrader. Besides car sales, Cox Automotive also studies the economics of buying cars. And it measures automotive affordability through Moody’s Analytics Vehicle Affordability Index.
This index is updated monthly and indicates the median number of weeks of income a person needs to afford a new car. And in April 2022, that number was 40.6 weeks. This is 18% more than in April 2021 and 78% of a full year’s salary. Additionally, Cox Automotive found that median income in the United States rose 0.3% in April 2022, but paid car prices rose 0.7%. Yet while this is bad news for all new-car buyers, it’s especially bad for Millennials and Gen Z buyers.
You see, rising car prices mean rising auto loans. Although the total number of new loans was 3% lower in the first quarter of 2022 compared to 2021, the average balance increased by 15.2%, according to credit reporting agency TransUnion. And because wages weren’t keeping pace with prices, some people couldn’t keep up with their payments. These people, for the most part, were members of Millennials and Gen Z.
Overall, 1.63% of auto loan holders defaulted in the first quarter of 2022. However, 2.21% of Gen Z and 2.14% of Millennial loan holders defaulted during of the same period. That’s up from 1.75% and 1.66%, respectively, before the pandemic.
In short, if new cars are less affordable than they once were, they’re even less so for Gen Z and Millennial buyers. And that’s before we get to the cost of ownership.
Fancy slats aren’t the reason Gen Z and Millennials can’t afford to keep their cars
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Before I start joking about avocado toast, let me remind you that “millennial” refers to someone born in 1980-1994. Meanwhile, a “Gen Z” individual is someone born no earlier than 1995. The oldest members of Gen Z are in their 30s and the oldest of Gen Y are in their 40s. We’re not dumb kids: we have mortgages and 401(k), people.
Mini rant over, there are a few possible reasons why car loans held by Gen Z and millennial buyers have higher default rates. First, although millennials have increased their purchasing power, they have not closed the wealth gap. Even before the pandemic, millennial incomes were 11% lower than they should have been, Business Intern reports. Second, Gen Z buyers typically have little to no credit history. This gives them poor or no credit, which also makes them prime targets for predatory lending.
On that note, there are fewer cheap new cars on the market. For example, the only new car under $15,000 in the United States, the Chevy Spark, is about to die. But due to the way the United States is car-centric, Millennials and Gen Zers often cannot afford not to own a car. Thus, relatively low incomes force them into either ridiculously long repayment periods or high-interest subprime loans.
But other subprime loan holders may soon get a taste of the woes of Gen Z and millennials. In March 2022, credit reporting agency Equifax found that 8.5% of subprime auto loans were in default. And that was just the end of an eight-month increase in crime rates, the the wall street journal reports.
What happens if you fail to repay a car loan?
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The best way to avoid defaulting on a loan is to not borrow more than you can afford. And I’m not just talking about a monthly payment: the interest accumulates quickly. But even the most rigorous financial planning can’t cover everything, like emergency medical expenses. And if you’re living paycheck to paycheck, defaulting on your car loan is all too easy.
Each financial institution has its own definition of “default”. Some might call it a delinquent loan only if you haven’t paid for 90 days, while others call it after 24 hours. But no matter the period, if you don’t pay, the bank/credit union can take it back. In other words, if you fail to repay a loan, you risk having your car repossessed.
The good news is that some institutions have deferment programs to give you financial relief. And a repossessed car isn’t necessarily gone for good. But if you’re continually on the verge of default, it might be time to cut your losses and find another way of transportation.
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