Young Americans’ finances could collapse under the weight of auto loans – another concern to address in this precarious economic environment.
The default rate for Gen Z and Millennial auto loans is now well above pre-pandemic levels, according to new data from credit bureau TransUnion. Generation Z, which includes those born in 1995 and later, has a 2.21 percent overdue rate, down from 1.75 percent before the pandemic. Millennials born between 1980 and 1994 have fallen behind on auto loans at a rate of 2.14 percent, compared to 1.66 percent before the pandemic.
The data comes against a backdrop of near-historically high car costs. According to Kelly Blue Book and its parent company Cox Automotive, the average new car now costs $46,526, just a little less than the record $47,000 set in January.
The Cox Automotive/Moody’s Analytics Vehicle Affordability Index hit its worst reading on record in April, showing that the number of average earnings weeks it takes to buy the average new car is now 40.6 weeks — nearly a year’s wages – after a downward revision 40.2 weeks in March.
“New vehicle affordability is still much worse today than it was a year ago when prices were significantly lower and incentives higher,” Cox said in a press release. “The estimated number of median household-income weeks it would take to purchase an average new vehicle in April was up 18 percent year-on-year.”
Amid these challenges, the overall volume of auto loans has fallen. According to TransUnion, in the last three months of 2021 the number of loans granted fell by 3 percent to 6.5 million compared to the same period last year.
That may be satisfactory enough for the Federal Reserve to conclude that financial conditions have tightened as hoped. Meanwhile, TransUnion says creditors seem to be responding to changing conditions by offering borrowers different types of forbearance.
“Supply shortages have pushed up vehicle prices and the closure of international factories will lead to a growing shortage of inventory for the remainder of the year,” TransUnion said in a May 23 blog post. “In addition to rising vehicle prices, rising inflation will also have an impact on consumers’ purchasing power. To keep monthly payments in check, we expect lenders will offer consumers options like extended loan terms to offset affordability challenges.
Still, the auto loan defaults are a sign amid the broader trend of an overall rising cost of living. While no generation is immune to this phenomenon, younger consumers are feeling the brunt of the crisis as they have fewer accumulated assets to act as a buffer.
In fact, a new survey of Gen Z and Millennials by advisory group Deloitte found that the cost of living was the top concern for both groups, ahead of other issues like climate change, unemployment, mental health and personal safety.
“Financial anxiety is rampant among Gen Zs and Millennials,” noted Deloitte. “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 lived from paycheck to paycheck and feared not being able to cover their expenses, with 30 percent of both groups expressing general financial insecurity.
The consultancy also found that a third of Millennials and 43 percent of Gen Zers have taken on side jobs alongside their main job. Meanwhile, 26 percent of Gen Zers and 31 percent of Millennials said they were not confident they would be able to retire with financial comfort.
It’s possible that these younger generations may have stretched their wallets, especially compared to other generations, thanks to an otherwise healthy raise they’ve recently received. Bank of America data shows that between May 2021 and April 2022, Gen Zers and Millennials received raises of 19.9 percent and 11.3 percent, respectively.
“Part of the rise of Generation Z will simply reflect that people in this group start their career paths from education, which inevitably entails significant salary changes,” according to Bank of America. “But it’s worth noting that Millennials appear to be seeing higher net pay increases than Gen X — it’s Gen X where the average salary is highest, so it seems Millennials are catching up a bit.”
However, the Deloitte survey shows that the financial picture is changing for younger generations.
“Fast forward to 2022 and sadly, economic conditions and quality of life have deteriorated in many parts of the world,” the survey reads. “Now, in the third year of the pandemic, we also face alarming geopolitical conflicts, extreme climate events, inequality and soaring inflation. Disruption does not seem to be a temporary condition, but has become part of the new normal.”