Struggling Young Home Buyers Continue to Miss Payments, Yet Lenders Continue Approval Process
Rising Auto Loan Delinquency Rates Among Gen Z and Millennials
A recent analysis of auto loan data reveals an alarming trend: higher delinquency rates among Generation Z (Gen Z) and Millennial car buyers compared to older age cohorts. This increase is primarily due to a combination of economic pressures, lower financial literacy, and the burden of existing debts.
In the first quarter of 2025, millennial loan balances grew by a modest 1.7%, a decrease from the same quarter in 2024. Meanwhile, Gen Z loan balances saw the fastest growth, at 15.4%, a decrease from the same quarter in 2023. However, these figures also show an increase in delinquency rates for both generations. Gen Z and Millennials had delinquency rates of 1.93% and 1.98% respectively, compared to Gen X's 1.42% and Baby Boomers' record-low 0.87%.
The primary reason for these higher delinquency rates is the increased cost of vehicles. Both new and used car prices have risen significantly, making them less affordable for younger buyers. This means they often take on larger loans that are harder to manage compared to previous generations. As a result, the average transaction price for a new vehicle in June was $48,907, up 1.2% compared to the same month in 2024. Lenders are willing to lend more than $30,000 to Millennials, the cohort buying the most expensive cars.
Another factor contributing to the higher delinquency rates is the rise in interest rates. Higher interest rates on auto loans further increase monthly payments and loan costs, which contributes to delinquency risk for younger consumers with tighter budgets.
In addition, studies show that Gen Z and Millennials generally have lower confidence and knowledge about financial topics such as credit scores, APR, and budgeting compared to older generations. For example, only about 10% of Gen Z understand differences among retirement accounts, and many are unaware of how credit works, leaving them less prepared to manage loans responsibly.
The impact of student loans and credit scores also plays a role. Student loan delinquencies among younger adults worsen their credit scores, reducing their ability to secure favorable auto loan terms. This increases their risk of delinquency due to higher borrowing costs or denial of credit.
Despite these challenges, dealers needn't worry about the ability of Gen Z and Millennials securing loans, as they still have a lot of access to credit. However, it is crucial for these borrowers to educate themselves about financial literacy and responsible borrowing to mitigate the risks associated with higher auto loan delinquency rates.
In conclusion, economic pressures from more expensive vehicles and loans, combined with lower financial literacy and the burden of existing debts like student loans, contribute to higher auto loan delinquency rates among Gen Z and Millennials compared to older generations. It is essential for these borrowers to take steps to improve their financial knowledge and management skills to avoid financial strain and ensure long-term financial health.
References:
- Car and Driver
- Forbes Advisor
- Consumer Financial Protection Bureau
- The increased cost of vehicles and the associated higher loan amounts, paired with lower financial literacy among Gen Z and Millennials, indicate a need for investment in personal-finance education to improve their understanding of budgeting, credit scores, and APR.
- As technology advances and automation becomes more prevalent in the business sector, there may be opportunities for fintech companies to develop educational resources to help young consumers, especially Gen Z and Millennials, navigate finance and investing, potentially reducing delinquency rates and enhancing personal-finance management skills.
