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Pro Take: Auto Loans Pass Student Loans in Consumer Debt Load, Fed Data Shows

Used cars for sale at Fast Trax Auto in May in El Cerrito, Calif. Auto loan delinquencies climbed to 3.59% in August on a seasonally adjusted basis, their highest level since April 2010, according to Moody’s Analytics.
Used cars for sale at Fast Trax Auto in May in El Cerrito, Calif. Auto loan delinquencies climbed to 3.59% in August on a seasonally adjusted basis, their highest level since April 2010, according to Moody’s Analytics.

Summary

American consumers face the headwinds of inflation, a softening job market and the resumption of federal student loan interest and payments. On top of all that, they have a lot of auto loans to pay off.

American consumers face the headwinds of inflation, a softening job market and the resumption of federal student loan interest and payments. On top of all that, they have a lot of auto loans to pay off.

Auto loans have squeaked past student loans this year as the second-largest debt burden for consumers, at $1.582 trillion compared with $1.569 trillion for student loans, according to Federal Reserve Bank of New York data. At $12 trillion, mortgages are the largest debt for consumers.

They had owed more in student loans than auto loans since early 2010 when a surge of college students, some of whom lost jobs in the financial crisis and sought education and new training, led to big student loan borrowing.

But the U.S. government froze payments and interest on federal student loans for the pandemic, an emergency measure that is now ending. Meanwhile, consumers bought vehicles at inflation-juiced prices. In June 2021, new- and used-vehicle inflation hit 20.4% and stayed elevated until late 2022.

Some cracks are now appearing in the auto loan market. Auto loan delinquencies climbed to 3.59% in August on a seasonally adjusted basis, their highest level since April 2010 shortly after the financial crisis, according to Moody’s Analytics.

Fed officials are considering this week whether to raise interest rates for a 12th time since early 2022 as they seek to lower inflation to their 2% target.

Headline inflation, based on the consumer-price index for August, was 3.7% for the 12-month period, an increase from 3.2% in July partly because of fuel prices. Core inflation excluding volatile fuel and food was 4.3% in August for the 12 months, compared with 4.7% in July.

The Fed has made progress on inflation, but policy makers and economists say inflation has to come down more. Higher interest rates, though, could slow the economy to the point of significant job cuts and higher unemployment, leading to stress on debt-strapped consumers.

When asked, Ford Motor Credit Chief Financial Officer Eliane Okamura said at an investor conference over the summer that the “unemployment rate is highly correlated with future delinquencies."

Joe Brusuelas, chief economist at RSM US, an assurance, tax and consulting firm, said the Fed should be done raising rates at this point. Even though student loan payments are resuming, Brusuelas said he believes the extra money put toward them will only lead to a blip of a decline in overall consumption.

A tight labor market and growing wages should allow consumers to pay their auto loans, he said.

“Consumption will remain resilient and the economy will muddle through this," Brusuelas said.

But for student loan borrowers who haven’t made loan payments yet and who are paying off vehicle debt, it could be a new world.

“You have some people who may never have made a single payment because this pause has been going on for three and one-half years," Nick Hillman, a professor of educational leadership and policy analysis at the University of Wisconsin-Madison, said of the federal student loan pause.

It is unclear whether auto loans will remain a larger burden on consumers than student loans. It seems unlikely given college costs, the resumption of interest charges on existing student loans, and weakening prices for new- and used-vehicles. But the next few months may be difficult for consumers with auto loans if the economy slows and unemployment rises.

Write to Bob.Fernandez@wsj.com

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