Gen Z and millennials default on auto loans at far greater rates than before the pandemic

Young Americans’ finances may have started buckling under the weight of car loans — one more worry to contend with in this precarious economic environment.

Generation Z and millennials today have auto loan delinquency rates that are significantly higher than their prepandemic levels, according to new data from the credit reporting agency TransUnion. Gen Z, which includes those born in 1995 and after, has a past-due rate of 2.21 percent, compared with 1.75 percent before the pandemic. Millennials, those born between 1980 and 1994, have fallen behind on car loans at a rate of 2.14 percent, compared with 1.66 percent before the pandemic.

The data stands against the backdrop of near all-time high automobile costs. The average new car now stickers at $46,526, just a bit off the record $47,000 reached in January, according to Kelly Blue Book and its parent company, Cox Automotive.

The Cox Automotive/Moody’s Analytics Vehicle Affordability Index hit its worst mark on record in April, showing the number of median weeks of income needed to purchase the average new vehicle now stands at 40.6 weeks — nearly one year’s worth of pay — from a downwardly revised 40.2 weeks in March.

“New-vehicle affordability continues to be much worse now than it was a year ago, when prices were notably lower and incentives were higher,” Cox said in a news release. “The estimated number of weeks of median household income necessary to purchase the average new vehicle in April was up 18 percent from last year.”

Amid those challenges, the total volume of auto loans has dropped. In the past three months of 2021, according to TransUnion, the number of loans originated dropped by 3 percent to 6.5 million from the same period the previous year.

That may be satisfactory enough for the Federal Reserve to conclude that financial conditions have tightened as hoped for. In the meantime, TransUnion said creditors appear to be responding to changing conditions by offering various types of forbearance to borrowers.

“Supply shortages have driven up vehicle prices, and the shutdown of international factories will lead to a growing lack of inventory throughout the remainder of the year,” TransUnion said in a May 23 blog post. “On top of increasing vehicle prices, rising inflation will also have an impact on consumer purchasing power. To help keep monthly payments in check, we anticipate lenders may offer consumers options like lengthened loan terms to offset affordability challenges.

Still, the defaults on car loans are a sign amid the larger trend of an across-the-board rising cost of living. While no generation is immune from that phenomenon, younger consumers feel the pinch the most, since they have fewer accumulated assets to act as a buffer.

Indeed, a new survey of Gen Z and millennials by the consulting group Deloitte found that cost of living was the top overall concern for both groups, ahead of other issues like climate change, unemployment, mental health and personal safety.

"Financial anxiety is widespread among Gen Zs and millennials," Deloitte noted. "They are worried about their day-to-day finances, and fear that they won’t be able to retire comfortably."

Deloitte also found nearly half of both generations were living paycheck to paycheck, and worry that they won’t be able to cover their expenses, with 30 percent of both groups expressing general financial insecurity.

The consulting firm also found one-third of millennials and 43 percent of Gen Zers have taken on side jobs in addition to their primary employment. 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 is possible that these younger generations have been stretching their wallets, thanks to an otherwise healthy pay bump they've recently received, especially when compared with other generations. Bank of America data shows that between May 2021 and April 2022, Gen Zers and millennials received pay increases of 19.9 percent and 11.3 percent, respectively.

"Some of the Gen Z rise will simply reflect that people in this group are embarking on their career journeys from education, which inevitably involves significant pay changes," according to Bank of America. "But it is noteworthy that millennials appear to be experiencing higher net pay rises over Gen X — it is Gen X where median pay is highest, so it appears millennials are achieving some catch-up."

But Deloitte's survey indicates the overall financial picture for younger generations is in flux.

"Fast forward to 2022 and, unfortunately, economic conditions and quality of life have deteriorated in many parts of the world," the survey said. "Now in the third year of the pandemic, we’re also facing alarming geopolitical conflicts, extreme climate events, inequality and a steep rise in inflation. Rather than being a temporary condition, disruption seems to have become part of the new normal."