When Will the Car Market Face a Crash Amid Rising Delinquencies and Inflation?

The car market has been under pressure for some time, but recent trends suggest a storm may be brewing. Inflation is high, and more borrowers are falling behind on their payments. Subprime loans, which carry higher risks, are on the rise. These factors combined raise a pressing question: when will the car market face a crash? This post explores the current state of the market, the risks involved, and what might happen next.

Used car lot showing a variety of vehicles, highlighting market diversity

Inflation’s Impact on Car Prices and Demand

Inflation affects the car market in several ways. First, it drives up the cost of new vehicles. Manufacturers face higher prices for raw materials and parts, which they pass on to consumers. This pushes new car prices to record highs, making them less affordable for many buyers.

At the same time, inflation reduces consumers’ purchasing power. When everyday expenses like food, fuel, and housing cost more, fewer people can afford to buy or lease a new car. This shift often pushes buyers toward used cars or financing options with longer terms and higher interest rates.

The result is a market where demand is fragile and prices are volatile. Dealers may struggle to move inventory, and buyers may stretch their budgets to secure financing, increasing the risk of default.

Rising Delinquencies Signal Trouble

Delinquencies on auto loans have been climbing steadily. According to recent data from the Federal Reserve Bank of New York, the percentage of auto loan borrowers 90 days or more past due has increased notably over the past year. This trend is especially pronounced among subprime borrowers, who already face higher interest rates and tighter budgets.

Higher delinquencies mean lenders face more losses. They may tighten lending standards, making it harder for some buyers to get loans. This can reduce overall demand and put downward pressure on car prices.

The increase in delinquencies also reflects broader economic challenges. Many households are stretched thin by inflation and rising interest rates, making it harder to keep up with monthly payments.

The Role of Subprime Loans in Market Stability

Subprime loans are loans made to borrowers with lower credit scores. These loans carry higher interest rates to compensate lenders for the increased risk. In recent years, the share of subprime auto loans has grown significantly.

While subprime lending can help more people access vehicles, it also raises the risk of defaults. When a large portion of loans are subprime, the market becomes more vulnerable to shocks. If enough borrowers default, lenders may face significant losses, leading to tighter credit and falling car prices.

The rise in subprime loans combined with increasing delinquencies creates a recipe for instability. It suggests the market could face a correction or crash if economic conditions worsen.

Close-up of a car loan application highlighting financial risk factors

Signs That a Crash Could Be Near

Several indicators suggest the car market might be heading toward a crash:

• Increasing loan defaults: As more borrowers miss payments, lenders may tighten credit or write off bad debts.

• Rising inventory levels: Dealers holding unsold cars for longer periods may cut prices to move stock.

• Falling used car prices: After a period of high prices, used car values may decline sharply if demand weakens.

• Tighter lending standards: Banks and finance companies may reduce subprime lending, limiting buyer access.

• Economic slowdown: If inflation persists and consumer confidence drops, fewer people will buy cars.

  
  

These signs often appear before a market correction. Watching these trends can help buyers and sellers prepare for potential changes.

What Could Trigger the Crash?

A few key events could trigger a crash in the car market:

• Sharp rise in interest rates: Higher rates increase monthly payments, pushing more borrowers into delinquency.

• Economic recession: Job losses and reduced income make it harder for consumers to afford car payments.

• Supply chain improvements: If new car production ramps up, used car prices could fall as supply increases.

• Policy changes: New regulations or changes in lending rules could restrict credit availability.

  
  

Each of these factors could reduce demand or increase defaults, leading to a market downturn.

How Buyers and Sellers Can Prepare

Both buyers and sellers should stay informed and cautious:

• Buyers should carefully assess their budgets and avoid overextending on loans, especially subprime financing. Consider the total cost of ownership, including insurance, maintenance, and fuel.

• Sellers and dealers should monitor inventory levels and market prices closely. Avoid overstocking and be ready to adjust prices if demand softens.

• Lenders need to balance risk and opportunity by tightening credit where necessary but also supporting responsible borrowing.

  
  

Understanding market signals can help all parties navigate potential challenges.

Dealership showroom with cars ready for sale, illustrating market readiness

Final Thoughts on the Car Market’s Future

The car market faces significant risks due to rising inflation, increasing delinquencies, and a surge in subprime loans. These factors create a fragile environment where a crash could happen if economic conditions worsen or lending standards tighten sharply.

While it is difficult to predict the exact timing, the warning signs are clear. Buyers should be cautious about financing decisions, and sellers should prepare for potential shifts in demand and pricing.