Subprime Auto Delinquencies Reach Record High as Loan Stress Deepens

Delinquencies in subprime auto loans have set a new high. More than 6% were found to be at least 60 days late, Fitch Ratings reported. That is the highest share on record.

Other borrowers’ delinquency rates remained low — prime borrowers had about a 0.39% delinquency rate earlier this year while subprime delinquency was 6.56%. This underscores the gap between credit tiers.

Subprime borrowers who purchased cars are now falling behind on payments. Steep costs, high interest rates, and flat pay are likely the key culprits. The obvious outcome are more skipped payments, along with some additional strain on the loan issuers. 

About 1.73 million vehicles were repossessed last year. That’s the most since 2009. Post-pandemic payments are harder to make now that easy lending and stimulus checks have ended. The bills are hitting some like a ton of bricks.

Lenders and carmakers haven’t necessarily reacted the same to the news. About 12% of GM loans went to buyers with sub-620 FICO scores so far this year. Ford targeted low-credit buyers with cheaper financing on its once bestselling F-150 pickups. Carmakers must continue to sell without unmanageable losses.

A Trend Toward Longer Loans

Many car buyers are signing up for six- and seven-year loans. Longer loans usually mean smaller monthly payments, all things being equal. They also mean it takes longer to build equity. Car values may go underwater — under the loan balance.

The irony is that high car prices have propelled monthly payments higher. Average payments exceed $750, with many loans topping $1,000 a month. That is placing pressure on consumer budgets, and larger payments over longer periods increase defaults.

Auto-loan-backed securities may underperform this year as default risks rise, according to Fitch. Lenders remain under pressure, even though investors continue to buy these securities.

Industry Response and Investor Confidence

Why do investors still buy auto-backed securities? Several factors are in play, including:

• Underwriting has tightened
• Banks are less exposed to subprime loans
• Investors expect tolerable losses

Bigger banks may be OK, but smaller lenders are feeling the heat. The recent Tricolor bankruptcy is proof that things can go bad quickly in the subprime market.

Auto makers love selling expensive cars and trucks. It’s good for their profits, but reduces the inventory of cheaper new vehicles. The result is a run on used cars. As their prices push higher, so do balances on used-car loans. Add this to the squeeze on low-income buyers.

A Hint of Credit Thaw

Not all signs point downward. Approval rates have held steady and new subprime originations have risen slightly in September. Banks are making loans more available, and vehicle finance companies and credit unions are following suit. Perhaps lenders are loosening standards just a bit.

They may be looking for business where it is available. This thaw may be real or just a blip. The economy is the wild card. Should it weaken, all these long-term, high-rate loans could backfire. Lenders must remain alert to losses as they chase new volume.

Bottom Line

Record delinquencies and higher repos are straining the subprime car loan market. Some lenders and investors have been able to keep the ABS market moving despite elevated delinquencies. Time will tell whether subprime lenders get too aggressive.