A growing number of Americans are falling behind on car payments at a rate not seen since the early 1990s, raising concerns about broader economic instability. Recent data from Fitch Ratings reveals that 6.65% of subprime auto borrowers were at least 60 days delinquent in October – a record high. This surge in defaults isn’t just a post-pandemic blip; it’s a worsening trend that could have significant consequences for both individuals and the financial sector.
The Subprime Crisis Deepens
The data focuses on subprime borrowers – individuals with lower credit scores who face higher interest rates. These are often people with limited financial flexibility, meaning they’re the most vulnerable when economic pressures rise. While prime borrowers (those with good credit) maintain a stable delinquency rate of 0.37%, the subprime sector is showing serious cracks.
The situation is so severe that two US subprime lenders, Tricolor and PrimaLend, filed for bankruptcy in September and October, respectively. This loss of lending options further restricts access to credit for already struggling borrowers.
Why This Matters
Auto loan defaults are often an early indicator of broader financial distress. When families are forced to choose between necessities like food, rent, and car payments, the car loan is often the first to go. This isn’t just about cars; it reflects a wider squeeze on household budgets.
The total outstanding auto loan debt in the US now exceeds $1.66 trillion, and the Consumer Federation of America (CFA) believes these auto finance issues foreshadow larger economic problems that haven’t fully materialized yet.
Conflicting Perspectives
Not everyone agrees on the severity of the situation. Some analysts, like those at Cox Automotive, argue there’s no immediate risk of a widespread “domino effect”. However, the escalating delinquency rates and lender bankruptcies suggest a growing fragility in the auto finance market.
The fact that defaults are mirroring levels from the early 1990s should not be dismissed. This is a clear signal that many Americans are struggling to keep up with rising costs, and the consequences could extend beyond just repossessed vehicles.
The rising number of defaults highlights the strain on American consumers, and this trend warrants close monitoring as a potential leading indicator of broader economic weakness.
