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Delinquencies on the Rise for Subprime Auto Loans

Subprime auto loans are back in a big way, and according to recent data have climbed to the highest level in a decade, with large increases in loans to borrowers with credit scores below 660.  The number of subprime auto loans becoming delinquent has climbed to the highest level since 2010 in the third quarter and is following a pattern similar to the months leading up to the 2007-2009 recession, according to data from the Federal Reserve Bank of New York.

New auto loans to borrowers with credit scores below 660 have nearly tripled since the end of 2009.  In 2016, approximately $50 billion of new auto loans per quarter have gone to those borrowers thus far.  About $30 billion each quarter has gone to borrowers with credit scores below 620.

The increasing delinquency of subprime auto loans is concerning because it comes as the overall economy is on the mend and the employment rate is improving.  The credit quality of other types of loans has improved.

Delinquency rates declined in the quarter for mortgages, student loans and credit cards.  The number of individuals with a new foreclosure notation on their credit reports hit the lowest level in 18 years of data.

The increase in auto loans, particularly the subprime sector, has raised alarms among some regulators in Washington. The rate at which auto loans for borrowers with credit scores below 620 has climbed for 10 consecutive quarters, especially on loans made to those with the lowest or subprime credit scores.

Lenders know that subprime borrowers are more likely to default and become delinquent on their loans and charge them higher interest rates.  The mistake during the financial crisis was that while the lenders expected higher defaults among subprime loans, they failed to anticipate just how high it would rise.

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