This post was originally published on TKer.co
While consumer debt delinquency rates remain low, they are picking up.
In a blog post Monday, the Consumer Financial Protection Bureau flagged the rate at which loans for recently purchased cars have been going delinquent. From the post (emphasis added):
When looking at delinquency in the first two years after purchase, loans originated in 2021 and 2022 are starting to show higher delinquency rates relative to loans originated in previous years, even when compared to loans unaffected by pandemic-related stimulus payments. For example, auto loans originated in 2021 have a delinquency rate of 0.67% in the sixth quarter after origination, which is 13% higher than the delinquency rate of auto loans originated in 2018.
The authors noted the trend was worse for subprime (credit scores between 580 and 619) and deep subprime (credit scores below 580) borrowers.
Part of the problem is a surge in average monthly payments, which are up 13% to 19% year over year, according to CFPB calculations.
Unless your wages have kept up, you can imagine the burden of making these payments has become far more onerous for borrowers.
Like most industries, automakers have been plagued by supply chain issues. Unique issues in the rental car market have exacerbated shortages in the market for used vehicles. As a result, vehicle price inflation has been hot.
To address higher prices, car dealers lengthened the terms of auto loans to help make monthly payments more manageable for buyers. But it wasn’t enough to offset surging prices.
A troubling economic indicator ⚠️
It’s never good to fall behind on debt payments. But it can be uniquely bad to go into delinquency with auto loan payments.
People need their cars for essential tasks like going to work and buying groceries. So drivers have a strong incentive to keep current on loan payments. Because if you fall too far behind, your car can get repossessed.
This is why auto loan delinquency rates are worth watching very closely. A sharp rise is a sign of real economic pain, reflecting lost jobs, weak wage growth, and the consequences of high inflation.
And while auto loan debt is nowhere near as large as mortgage debt, a rise in bad debts puts pressure on banks, which in turn may be forced to tighten lending standards.
The other side 🚗
While rising delinquency rates may reflect borrowers’ struggles, it’s a phenomenon that corrects itself.
As more borrowers go into serious delinquency, more cars get repossessed. And as more cars get repossessed, more supply enters the used car market. And when more cars enter the used car market, prices come down.