Subprime Auto Loans: Worsening Delinquencies are of 'Significant Concern'

Newly-issued auto loans have increased at a brisk pace over the past few years, with 2016 shaping up to be the strongest of any year recorded by the New York Federal Reserve since 1999. The New York Fed tracks U.S. household debt and consumer loan performance.

In a blog post Wednesday on the New York Fed’s Liberty Street Economics site,  researchers focused on the  deteriorating performance of subprime auto loans and signs of potential problems down the road for the auto loan industry.
“The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,” the report said.
Auto loan data, overall, show that the 90-plus day delinquency rate increased only slightly in 2016 through the end of September to 3.6 percent.
But the relatively stable delinquency rate “masks diverging performance trends across the two types of lenders.”
Specifically, there is a worsening performance among auto loans issued by auto finance companies. This downturn masks improvements in the delinquency rates of auto loans issued by banks and credit unions.
“The 90-plus day delinquency rate for auto finance company loans worsened by a full percentage point over the past four quarters, while delinquency rates for bank and credit union auto loans have improved slightly,” the report said.
An even sharper divergence appears in loan delinquencies when broken out by the borrower’s credit score at origination.
“It’s worth noting that the majority of auto loans are still performing well — it’s the subprime loans that heavily influence the delinquency rates,” the report states. “Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to have experienced declining performance in their auto loan portfolios.”
The notable deterioration in the performance of subprime auto loans translates into a large number of households, with roughly 6 million individuals at least 90 days late on their auto loan payments.
“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” researchers said.

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