U.S. subprime auto loan delinquency rate hits record high, as high car prices and high interest rates increase the burden.

The delinquency rate for auto loans among US subprime borrowers has risen to a historical high, aggravating the financial pressures faced by low-income groups.

According to Fitch Ratings data, as of October, the proportion of "subprime borrowers" who were more than 60 days overdue in the US increased to 6.65%, setting the highest level since records began in 1994. Persistent inflationary pressures and the resumption of student loan repayments are making it difficult for millions of car buyers to meet their monthly payments.

"Subprime borrowers" refers to borrowers with poor credit qualifications. These borrowers are considered to be at higher risk of default, so when financial institutions issue loans to them, such as auto loans and mortgage loans, they tend to charge higher interest rates or set stricter terms.

Signs of deteriorating financial conditions among these consumers became especially evident in September. Wallstreetcn previously mentioned that at the time, Tricolor, a used car dealership and subprime auto loan provider, suddenly declared bankruptcy, forcing major financial institutions exposed to subprime borrowers to reassess the related risks.

Expansion of Subprime Borrowers

According to TransUnion data, this year the proportion of consumers with the worst credit conditions has increased, reaching the highest level since 2019.

In the third quarter, such subprime borrowers accounted for 14.4% of all tracked consumers, up from 13.9% in the same period last year.

For many borrowers, finding stable employment is becoming increasingly difficult.

Economic indicators in September showed slowing recruitment and weakened labor demand. Companies such as Starbucks, Target and Amazon have recently announced layoffs. A report shows that as of October, the number of layoffs in the US this year was close to one million, the highest level for the same period since 2020.

Miriam Neal, a 29-year-old from Atlanta, lost her research job in December last year and was unable to pay her auto loan, resulting in her car being repossessed.

She raised funds to reclaim her vehicle through GoFundMe, but still struggles to pay the bills. Currently, she drives for Amazon Flex, earning about $100 a day, but this is not enough to cover all her bills. She said:

Usually, I pay 30 days late.

High Car Prices and Interest Rates Increase Burden

Consumers also face high car prices and borrowing costs, leading more people to owe more on their car loans than the actual value of their vehicles.

According to Edmunds.com data, in the third quarter, more than 28% of new car trade-in transactions had negative equity (i.e., the loan balance exceeded the current vehicle value), the highest level since the first quarter of 2021.

Meanwhile, the average price of new cars recently surpassed $50,000 for the first time. For the highest-risk borrowers, high interest rates further increase the financial burden.

Experian data shows that in the second quarter, deep subprime consumers, whose credit scores range from 300 to 500, faced an average new car loan interest rate of about 16%, and a used car loan rate of 21.6%.

Megan Langhoff, a 34-year-old resident of Genoa City, Wisconsin, pays 29.5% interest on her 2014 Kia Optima, with a monthly payment of $483. She works as a manager at McDonald's and had an interest rate of 32% when she bought the car. She said:

My principal has hardly decreased over the past two years, because once you fall behind, late fees accrue and it's hard to catch up.

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