Subprime Default Patterns Mirror Pre-Recession Warning Signs Across Auto and Personal Loan Markets

Subprime borrowers are already struggling, and there may be signals that a recession has started.

More than 10% of the debt owed by borrowers with credit scores under 660 was delinquent in February. Mark Zandi, chief economist at Moody’s Analytics, called this rate the “highest delinquency rate in more than a decade,” MSN reports. 

Zandi said he is worried about the financial health of subprime borrowers. Despite an unemployment rate of 4.4%, subprime borrowers are having a tough time making loan payments. They also face gas prices hitting $4 per gallon, higher interest rates, and few options for refinancing, MSN reports. 

These subprime borrowers will feel the pinch even more if unemployment rises. Without a steady paycheck, they may fall further behind on their loans and other financial obligations such as rent or mortgage payments.

Delinquency as an Economic Indicator

When subprime borrowers struggle, it is a reliable economic indicator that trouble times may be coming, according to Zandi. So that 10% loan delinquency rate is a concern for everyone and not just the subprime borrowers struggling with their payments.

All these warning signs occurred before the fighting in the Middle East so subprime borrowers and all Americans may face additional financial strain in the months ahead, MSN reports.

“Recession risks thus remain uncomfortably high, with close to even odds of a downturn in the coming year,” Zandi wrote in a LinkedIn post. 

Already in a Recession

Zandi already sees one signal that indicates the U.S. economy is in a recession because of changes in unemployment and the labor force.

This signal is called the Vicious Cycle Index and was created by Zandi and his team at Moody’s. The Vicious Cycle Index takes into account changes in the five-year moving average of labor force participation, which includes discouraged workers who have given up finding work, Business Insider reports.

This rate has been declining in the past two years.

The Vicious Cycle Index rose higher than 1 in January, which suggests the U.S. economy entered a recession in January and remained in recession in February and March, according to Business Insider.

If an economic downturn occurs this year, this is one early indicator that it could and did happen. Regardless of the overall economy, many subprime borrowers are struggling to pay down their loans right now. These delinquency rates are troubling and portend more trouble for borrowers and lenders if unemployment rates rise. 

The Bottom Line

Delinquency rates on loans for borrowers with credit scores below 660 rose higher than 10%, the highest rate in more than a decade. In short, many subprime borrowers are struggling to make loan payments.

In addition to difficulties making loan payments, subprime borrowers face gas prices of $4 per gallon, higher interest rates, and few options for refinancing. 

When subprime borrowers struggle, it is a reliable economic indicator that trouble times may be ahead. Another indicator called the Vicious Cycle Index monitors changes in the five-year moving average of the labor force participation rate. This rate had been declining for two years, and in January reached a recession level.