6 million Americans have stopped paying their car loans, and it’s becoming a ‘significant concern’

The delinquency rate for subprime is ticking up. Liberty Street Economics

There is a lot of talk out there about the auto-loan market right now.

It’s a topic we’ve been paying attention to as well. In a presentation in September at the Barclays Financial Services Conference, Gordon Smith, the chief executive for consumer and community banking at JPMorgan, set out some eye-opening statistics on the market.

Now the Fresh York Federal Reserve is taking a closer look at the market. In a blog published Wednesday on the Fresh York Fed’s Liberty Street Economics site, researchers highlighted the deteriorating spectacle of subprime auto loans and set off the alarm.

“The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,” the report said.

To be clear, the overall delinquency rate for auto loans is pretty stable, and the majority are performing well.

There are, however, signs of stress in the subprime market segment, which has seen rapid growth. Here are the key numbers from the report:

• The subprime delinquency rate for the trailing four quarter period moved to 2% in the third quarter. The only other time it was 2% or more was in the aftermath of the financial crisis.
• Subprime auto loan originations hit $31.Trio billion in the third quarter, down from $33.6 billion in the 2nd quarter. Bank and credit unions originated $9.Five billion in subprime auto loans in the period, a record high.
• Outstanding subprime auto loan balances now stand at $280.Two billion, a record high. For perspective, the pre-crisis high was $249.Five billion, in the fourth quarter of 2007.

In other words, the subprime delinquency rate is creeping up, while the subprime market is ballooning in size. The Liberty Street Economics post, written by Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw, said:

“The data suggest some notable deterioration in the spectacle of subprime auto loans. This translates into a large number of households, with toughly six million individuals at least ninety days late on their auto loan payments.”

Subprime auto-loan issuance has been on the rise. Liberty Street Economics

This research has broader significance beyond the auto-loan market. We’ve previously reported at length on the worrying state of US consumer finances.

According to UBS research, 65%, 36%, and 22% of lower-, middle-, and higher-income cohorts are “stressed.” That means their income falls below or hardly covers their expenses. And almost one in five stressed households, or 18%, agreed or strongly agreed with the likelihood of a default over the next year.

When these stressed households were asked what debt they were most likely to default on, auto loans ranked third, behind credit cards and student debt.

“Even however the balances of subprime loans are somewhat smaller on average, the enhanced level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” the Liberty Street Economics post said.

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