More Canadians falling behind on car payments after big run-up in auto prices

Delinquencies have surpassed pre-pandemic levels and are poised to rise further, CIBC says

Jeep vehicles outside a Jeep dealership in South Edmonton. 
On Saturday, January 22, 2022, in Edmonton, Alberta, Canada. (Photo by Artur Widak/NurPhoto via Getty Images)
Car loan delinquencies are rising as Canadians feel the sting of higher borrowing costs and inflation, a new report says. (Photo by Artur Widak/NurPhoto via Getty Images)

A combination of soaring car prices, higher borrowing costs and the surging cost of living is making it harder for some Canadians to keep up with their car payments, a CIBC Capital Markets report says.

"Delinquency rates for auto loans are now through pre-pandemic levels and likely heading higher in 2023," Paul Holden, an analyst at CIBC and lead author of the report, said on Wednesday.

"The average size of auto loan increased with higher prices, contributing to higher monthly payments for borrowers. Inflation, interest rate and economic pressures are making these higher payments harder for consumers to afford."

Auto loan delinquency rates reached two per cent in the third quarter last year, up from 1.7 per cent in the year prior and above the average of 1.8 per cent in the pre-pandemic years of 2018 and 2019.

CIBC notes new and used car prices jumped 30 per cent and 60 per cent, respectively, from April 2020 to December 2022.

With some household budgets stretched beyond their limit, Canadians are having to choose which debt payments they make and which ones they fall behind on.

"Typically, when consumers are in a very tight spot financially, they stop making payments on things like credit cards, lines of credit and personal loans long before they would ever do so on secured debts like a mortgage, their rent, or a car loan," said Scott Terrio, a certified credit counsellor and manager of consumer insolvency at Hoyes, Michalos Licensed Insolvency Trustees.

"But given the choice between making your shelter payment and your car loan, the car loan will always go delinquent first."

However, those Canadians are still taking a gamble, Terrio adds.

"They will take their chances that a secured lender does not want to repo a car until they absolutely have to since they will most likely end up with a loss and an expensive collection pursuit as a result," he said.

CIBC says the average Canadian still has some excess savings set aside from the pandemic, but it's growing more concerned about lower-income households' ability to keep up with payments.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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