Experts: Rising LTVs Suggest Number of Auto Loan Delinquencies On The Horizon

CHICAGO, IL – Skyrocketing vehicle prices driven by supply chain issues during COVID-19 have now left many motorists with loans that greatly exceed the value of what their car is worth, following a corresponding decline in vehicle values now that the pandemic is in the rear-view mirror and automotive inventories are rising once again. 

A new report released Tuesday from credit reporting firm TransUnion and market researcher J.D. Power indicates that used car loan-to-value ratios in the first three months of 2023 have jumped to 125, as compared to the same period of time in 2021 when that number was 104. 

In simple terms, a loan-to-value ratio of 125 indicates that a loan that a borrower has taken out is worth 125 percent of the value of their vehicle, illustrating the fact that negative equity – meaning the amount of debt that exceeds an item’s value – has greatly increased amongst Americans in recent years.  

Such a large jump in loan-to-value ratios, experts say, could be indicating that a growing number of loan delinquencies are on the horizon.  

According to Satyan Merchant, a senior vice president at TransUnion, it’s getting so bad that some consumers are already $10,000 underwater when they’re stepping into a car dealership. And with vehicle values expected to decrease even more in the near future, some lenders are starting to tighten up the reins on loan qualifications as they grow more cautious, he said. 

As vehicle prices have risen and overall inflation remains elevated, consumers are increasingly starting in higher than average loan-to-value positions to afford used vehicles,” Merchant said. “Given the possibility that accelerated depreciation will result in negative existing LTVs for longer periods, this will be especially important for lenders to monitor.”