Auto loan delinquencies rise with higher prices

Another benefit is what Kukla calls an “escape hatch.” Many renters, especially used car owners, still have because of their high resale value.

Some consumers can eliminate most of their loans by selling their cars, Kukla said. This is because the lender can make more money from the result than taking the car back and selling it at auction.

But if used car prices continue to fall, this solution could be shut down, further penalizing consumers who are behind on payments. These subprime and deep subprime borrowers had poor credit scores to begin with, so they may end up getting their reports foreclosed.

According to Kukla, the outcome will also have a negative impact on lenders. The reason the current escape his hatch works is that lenders can get their money back and borrowers can have their loans extinguished. If a lender has to repossess a depreciated vehicle, it will affect the way they do business.

“If you took out a loan that was supposed to be backed by a $40,000 car, and is now backed by a $20,000 car, you have a little less leverage,” Kukula said. “What does that mean for what lenders do after foreclosure?”

The CFPB makes no predictions as to when this scenario will occur.

“We hear almost every month that supply chain issues improve in about six months,” said Kukla. “I think this is a very difficult question to answer. It’s one that has a pretty big impact on the market and certainly on the consumer.”