Subprime Auto Defaults Grow by Double Digits
Aug 31st, 2016 @ 8:55 PM by Amber Nelson
American consumers with bad credit are falling behind on their car payments at an increasingly high rate, according to Fitch Ratings, a sign that the subprime market may have peaked for the foreseeable future.
In July 4.59 percent of subprime auto loan borrowers (those with credit scores of 600 or lower) were 60 days or more delinquent with their payments, representing a 17 percent increase from the year before and a 13 percent rise from June.
Subprime car loans are bundled together and sold on the secondary markets to investors. Net annual losses on these poor-credit loans climbed to 7.39 percent in July, up 17 percent from the previous month and 28 percent from July 2016.
While the numbers seem alarming, Fitch executives put the growth in perspective. “We’ve seen an increase across the board. It’s nothing unexpected given that over the last two or three years lenders have loosened up credit standards,” said Hylton Heard, senior director at Fitch. “It’s manageable and it is more exacerbated in the subprime sector.”
Among those with good credit, Fitch found that 0.40 percent were delinquent on their auto loans in July, up 12 percent from June and 21 percent from a year earlier. Annualized net losses on prime (good credit) loans climbed to 0.48 percent, up from 20 percent in July 2016. Even as the rates remain relatively low, Fitch predicts that “the pace of losses is likely to increase as the fall approaches.”
That likely rise in losses in both prime and subprime car loans will probably come as a result of declining used car values. Borrowers will have to borrow more to buy newer cars as the trade-in values of their current vehicles fall. And high loan balances combined with falling vehicle values could spell default for more consumers as the year progresses.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.