US auto loan defaults have reached a six-year high, with subprime borrowers being hit hardest. According to Fitch Ratings data, the number of subprime automobile borrowers at least 60 days past due has increased to 6.56 percent, the highest since 1994. The Federal Reserve Bank of New York reports that delinquency rates for all auto loans have risen to 3% in the fourth quarter, also a six-year high.
Economists attribute this trend to persistent inflation and high interest rates affecting lower-income households. “American households are coming under increasing financial stress,” said Dave Gulley, an economics professor at Bentley University. High car prices and loan rates have left many car owners with $1,000+ monthly payments.
The rising delinquencies create a negative feedback loop in the market, forcing lenders to tighten standards and put additional pressure on consumers. The subprime market remains vulnerable to stressed American households. Mariano Torras, an economics professor at Adelphi University, calls this a “canary in the coal mine” for the broader economy.
Torras warns that fundamental economic weaknesses have been present for longer than typical business cycles, and problems with subprime auto loans may spread to other areas of the economy, including mortgages. As many households are already depleted of their pandemic-era savings, a disappointing jobs report threatens to further strain vulnerable borrowers.
Source: https://qz.com/borrowers-feel-the-strain-pushing-auto-delinquencies-h-1851768163