- Car loan delinquencies in Australia are rising, with more vehicles being repossessed and sold at auctions.
- Inflation, high interest rates, and the diminishing ability of car owners to refinance drive the rise in repossessions.
- Over $1 bn in new car loan commitments each month underscores Australians' widespread reliance on financing for vehicle purposes.
- Car loan delinquencies are disproportionately affecting younger Australians, who are more likely to rely on family for financial support.
- The rise in car loan delinquencies has raised concerns about potential spillover effects into the housing market, but the CFO of a major non-bank lender notes that delinquency rates remain relatively low.
The number of repossessed cars hitting the auction block has continued to rise, highlighting the worsening financial difficulties that make it increasingly challenging for many Aussies to hold onto their vehicles.
Automotive auction site Pickles reported a recent spike in reclaimed vehicles going on sale, rising 13% in the last six months and 11% over the second quarter of 2024.
Describing the rates of increase as "significant", Pickles noted multiple factors driving this trend.
"Pickles considers the two key contributing behind this growth to be ongoing cost-of-living pressures - relating to high inflation and interest rates - along with owners' ability to refinance diminishing as vehicle values generally decline," the report stated.
Put simply, falling used car prices coupled with rising living costs (i.e. food, housing, etc.) have hindered the ability of car owners to refinance their rapidly depreciating assets.
How many people have car loans in Australia?
On average, about 40-45% of cars purchased in Australia are financed through car loans.
The value of new car loan commitments continues to hover above the $1 billion mark, with the latest ABS lending indicator data showing that $1.4 billion of new personal loans were signed in June 2024 for the purchase of road vehicles.
That equates to an increase of 0.5%, seasonally adjusted, from a year ago. Compared to, say, 2006, the value has more than doubled.
According to the 2024 State of Aussies' Savings Survey by InfoChoice, 23.6% of Australians have a car loan, with indebted men more likely to have a car loan than women (25.8% vs 21.3%).
Across all age groups and genders, car loans rank as the third most common debt an average Aussie has, next only to home loans and credit card debt.
What are the reasons for car repossessions?
In Australia, cars are repossessed for a variety of reasons, most of which are related to financial difficulties or breaches of the terms of the loan or lease agreement. Obviously, this doesn't apply to those who bought their cars in cash, but only to those who used a car loan to purchase their vehicles.
Missed loan repayments
Lenders may initiate repossession to recover the outstanding debt if the borrower falls behind on monthly loan repayments. Typically, lenders may start the repossession process after two missed repayments, meaning the borrower has been in arrears for 60 days. Others might wait until three or more payments are missed.
Under the National Credit Code (NCC), lenders are required to issue a default notice to the borrower, providing them with at least 30 days to remedy the missed payments before they can take further action. The notice must outline the amount overdue and the steps required to avoid default.
During the 30 days, the borrower may choose to pay, negotiate with the lender, or face repossession. The repossession process will be triggered once the period elapses and the borrower fails to settle their overdue payment. If the repossessed car does not pay off the outstanding balance, the borrower will still be liable for the difference.
However, note that in most states in Australia, the asset seizure cannot take place on private property (like a driveway) without the borrower's consent or a court order. This aims to protect borrowers from unlawful entry.
Loan default
In addition to missed repayments, a loan might go into default if the borrower fails to meet contractual obligations, such as:
-
Unable to maintain the required insurance on the vehicle;
-
Uses the car for purposes not permitted by the loan agreement (e.g. commercial use when the car loan is for personal use); or
-
Engages in fraudulent activity related to the loan
Failure to refinance
If a borrower is struggling financially and is unable to refinance the loan or negotiate more favourable terms, this can lead to missed payments and eventual repossession.
Among other reasons, lenders typically consider the loan-to-value ratio (LVR) and the vehicle's age and condition when refinancing a car loan. A high LVR, meaning the loan is close to or exceeds the car's value, may make it more difficult to refinance or could result in less favourable terms. And cars that are too old or have high mileage might not qualify for refinancing.
With cars losing their value over time, called depreciation, about 25% per annum according to the Australian Tax Office, refinancing can be in fact a challenge for many used vehicles.
Voluntary surrender
Sudden changes in the borrower's financial situation, such as job loss, illness, or a significant drop in income, may lead to the voluntary surrender of the vehicle. Car owners may elect to take this route to avoid further financial strain or legal consequences.
Car loan delinquencies are on the rise: What does it mean for home loans?
As car loan delinquencies surge in Australia, concerns mount that similar financial pressures could extend to the housing market.
Fitch Ratings notes a significant uptick in 30+ days arrears in Q4 2023, climbing by 17 basis points to 1.36% against 1.19% in the previous quarter. Those in arrears for more than 60 days reached 0.66%, up 12 basis points from 0.55%.
While the increase has been marginal, the pace of growth has resulted in the rating agency forecasting that arrears will continue to climb from the lows in 2022, "as borrowers continue to feel the pressure from inflation and limited real wage growth."
Data from Westpac likewise revealed an increasing rate of automotive arrears, with the number of borrowers over 90 days late on their repayments about twice the rate of two years ago.
However, one of Australia's non-bank lenders believes the delinquency rates of car loan customers remain "very low".
Firstmac CFO James Austin said car loans in arrears at the non-bank lender are only 1%.
While a much lower 0.5% of the total home loans under Firstmac management have more than two payments missed.
"As far as long-term arrears rates and default rates are concerned, these are still very, very low. Even for auto borrowers, 99% are on time and making their payments," Mr Austin told the Savings Tip Jar podcast.
Firstmac CFO James Austin shares his insights into the state of car loan and home loan delinquencies in Australia on the Savings Tip Jar podcast.
Firstmac's car loan delinquencies being two times the rate of mortgages is pretty common, as people tend to cling to their homes more than their cars. So it's likely that car payments will be missed before home payments.
Interestingly though, more than a quarter (26.2%) of adult Aussies surveyed by InfoChoice are willing to sell their home if their savings run out and lose their income.
However, selling by choice is different to falling behind on the mortgage and waiting until repossession, which is a lengthy process.
Against all odds though, most borrowers are still able to meet their obligations despite the currently high cash rate hurting debtors.
"When you think we've had over 400 [basis] points of rate increases, it's actually surprising that it's all held up so well," Mr Austin added.
How are Aussies managing their car loan repayments?
Car loan delinquencies are skewed towards younger borrowers. If we're talking about Gen Z, the InfoChoice survey did find that 10.1% of them have a car loan - their third highest source of debt after HECS-HELP and mortgage.
Does this mean they're having more difficulties?
"When these sorts of events happen, it does tend to discriminate against younger, less experienced workers. So it's quite possible that you're starting to see that," Mr Austin noted.
But if their savings run out and lose their income, this age cohort is the most likely (78.7%) to rely on family and friends for help in covering their living expenses and meeting their debt repayments.
Perhaps help from loved ones is enough, as 75% of Gen Z respondents to the InfoChoice survey said they had never resorted to personal credit products to make ends meet.
Advertisement
Photo by Trace Constant on Pexels
Need help with a car loan?