Subprime Auto Default Could Lead to Other Defaults
Apr 19th, 2017 @ 8:57 PM by Amber Nelson
Roughly 17 percent of U.S. consumers believe they will default on an auto loan payment over the next 12 months, fueling concerns that defaults on subprime auto loans are affecting more of the economy than predicted.
According to a new survey from the UBS Evidence Lab, only about 16 percent of all current car loans are subprime, making up $179 billion of the $1.07 trillion in U.S. auto loans outstanding. The Federal Reserve reported in January in it survey of senior loan officers that 38 percent of large banks expect the quality of their auto loans to decline this year.
While trouble in the auto loan market is worrisome, the more troubling news is that car loan defaults appear to be influencing the quality deterioration of other types of loans as well. The Fed’s January survey also found that 37 percent of large banks expect their credit card loan quality to weaken in 2017. And 23 percent of U.S. banks are predicting that consumer loan delinquencies will increase this year as well.
The UBS report also forecast that rising consumer default rates would spread from auto loans to other loans. “We are already seeing evidence that subprime personal unsecured and credit card delinquency rates are rising from low levels in recent vintages,” the report said “… Further, poor performance in auto loans is increasingly emerging not only in subprime but also non-prime (and some prime) loans.”
The rising auto defaults are also pushing lenders to strengthen their credit standards again. In the latest Federal Reserve loan officer survey 11.7 percent of banks reported tightening their auto loan lending standards and 8.3 percent said they had set a higher bar on their credit card requirements.
It is interesting to note that the 17 percent of Americans who expect to default on a loan this year are mostly young, urban and male. They are also those with middle and upper income levels and concentrated in the West and Northeast.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.