Auto Loan Delinquencies Are on the Rise. Here Are the Consequences of Falling Behind

Owning a car is always expensive. But this year, you might really end up in over your head if you're forced to sign a new auto loan.

During the first quarter of 2023, the average monthly car payment rose to $730, according to Edmunds. We can attribute that to a combination of higher vehicle prices and financing rates on the heels of the Federal Reserve's recent string of interest rate hikes.

Of course, the more you have to pay on an auto loan, the greater the risk of falling behind. And so it's not surprising to see that auto loan delinquencies are on the rise.

During the first quarter of 2023, the auto loan delinquency rate was 6.9%. During the second quarter of the year, it was 7.3%.

But falling behind on an auto loan could have serious consequences. It's best to do what you can to avoid that situation at all costs.

When you can't keep up with your car payments

Failing to make your auto loan payments could result in you having your vehicle repossessed. Auto loans are secured, which means your lender has the right to go after the asset your loan was used to finance. 

More so than that, any time a loan of yours becomes delinquent, whether it's an auto loan, a home equity loan, or an unsecured personal loan, you run the risk of damaging your credit score. Of the various factors that go into calculating your credit score, your payment history carries the most weight (35%). And it speaks to how timely you are with bills and debt payments. When you don't pay your debts, you unfortunately send a message to future lenders that you may not be so trustworthy as a borrower.

How to avoid falling behind on your auto loan payments

When your financial circumstances change unfavorably and unexpectedly, you might fall behind on your auto loan despite having borrowed a modest sum given your income. And that can't always be helped.

But let's say you're in the market for a new car. What you'll want to do is make a list of your ongoing expenses, compare their cost to your paycheck, and figure out what monthly loan payment is reasonable for you given those numbers. If you set a limit as to what loan payment you can afford and don't go beyond it, you'll be less likely to fall behind.

Of course, this strategy doesn't account for factors like job loss. But if you make a point to maintain an emergency fund, you'll have cash reserves to tap so you can keep up with your auto loan payments and other bills in that sort of scenario.

Meanwhile, if you already owe money on a car loan and are struggling to pay it, reach out to your lender and talk through your options. You may be able to adjust your loan payments to a lower amount or even pause them for a period. But it's better to discuss things with your lender than to simply stop paying, because if you blow off your loan payments, you might lose your vehicle and face serious credit score damage.