Record Number of Lower-Income Americans Fall Behind on Car Payments – The Average Joe
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    Record Number of Lower-Income Americans Fall Behind on Car Payments


    October 24, 2023

    The auto industry’s “check engine” light has been on for far too long, and now it’s blinking urgently. Unfortunately, for some lower-income drivers, it may be too late to fix, despite repeated warnings from Sheldon.

    Odometer reading: In September, the number of American subprime (credit scores below 670) auto borrowers at least 60 days behind on their auto loans hit a record high of 6.11%. Rising delinquency rates show just how much lower-income Americans are struggling, emphasizing the most significant economic pressure since the Great Recession. Higher interest rates and auto prices are mostly to blame:

    • Subprime borrowers now pay up to 22% on their new or used auto loan, similar to credit cards.
    • Monthly new car payments now average $760 for subprime borrowers, and while used car payments have declined, they’re still coming in at $536.

    The number of auto repossessions is also rising. Cox Automotive estimates that 1.5M vehicles will be seized this year, up from 1.2M last year.

    How big of a problem is this?

    In the third quarter, US light vehicle sales jumped 17% from the previous year — showing little signs of a slowdown in auto sales. And per S&P Global, delinquencies have been “almost entirely in the subprime segment.” When accounting for all loans, the percentage of late payers in Q1 was only 1.69%, which still surpasses the peak of 1.46% during the Great Recession. Comparatively, the impact of subprime loan delinquencies is small but meaningful.

    • Nearly a third of US consumers are subprime borrowers (Experian) — who “can often be a first line of where we start to see the negative effects of macroeconomic headwinds,” per Fitch’s Senior Director Margaret Rowe (BBG).
    • According to S&P Global, subprime borrowers have represented around 15% of total outstanding loans since the Great Recession — while loans to those under a 660 credit score made up nearly 25% of the $162B loan originations in 2023 Q1.

    Forward-looking: Last month, US Auto Sales, which even sold to subprime borrowers through its dozen dealerships, filed for bankruptcy — joining several other subprime-focused dealerships that’ve gone under this year. The pain may not end there, with Moody’s warning that delinquencies will continue “rising materially” in 2024, potentially peaking at 10%.

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