According to recent figures from Fitch Ratings reported by Bloomberg, a record number of subprime borrowers in the US are falling behind on their auto loan payments by 60 days or more. The delinquency rate reached 6.11% in September, the highest since records began in 1994. This is up from 5.93% at the beginning of the year. Analysts predict that delinquencies will continue to rise and may peak at around 10% in 2024 before starting to decline.
The high delinquency rates suggest that many lower-earning workers are facing difficulties due to factors such as high inflation, a challenging job market, and the resumption of federal student loan payments following the pandemic-era freeze. Additionally, high interest rates are impacting borrowers, leading many to rely on borrowing to manage their financial obligations.
It is important to note that delinquency rates do not necessarily indicate an impending recession but can serve as a reflection of an economy facing challenges. Margaret Rowe, senior director at Fitch, stated that subprime borrowers are particularly affected and often experience the negative effects of macroeconomic headwinds early on.
Subprime borrowers, who have lower credit scores and are considered less likely to meet their loan repayments, typically face higher interest rates. For example, subprime borrowers pay an average interest rate of 11.5% for new cars and 18.5% for used vehicles, compared to prime borrowers who pay 6.4% and 8.75% respectively.
The rising delinquency rates also have consequences beyond financial struggles. Many individuals risk having their cars repossessed, which can significantly impact their ability to commute to work. In 2022, only 11% of US commuters used public transportation, according to the World Economic Forum.
Despite the challenges, record numbers of new car buyers are taking out loans with monthly payments of $1,000 or more. This trend is particularly notable among Gen Zers and millennials, for whom car payments have become a significant expense, often surpassing their rent.
In summary, the increasing delinquency rates among subprime borrowers in the US auto loan market highlight the financial difficulties faced by lower-earning individuals. Factors such as high inflation, a challenging job market, and the resumption of student loan payments contribute to these struggles. The rising interest rates and the potential for vehicle repossession further compound the challenges faced by these borrowers. However, it is worth noting that some consumers are still taking out loans for new cars, even with high monthly payments.