Overdue subprime car loans climb to higher interest rate since April 2020, a possible sign of trouble

Wall Street has begun to see more borrowers with reduced credit falling months behind on subprime car loans, a possible sign of consumer credit cracks as the Federal Reserve moves to fight inflation.

High-risk car loans have been a surprisingly strong household debt hub for the past two years of the pandemic, with the help of temporary Washington aid that has boosted the finances of many families.

Early indicators now point to a more difficult path ahead, especially for the low paid faces higher prices at the grocery and gas station, without child tax credit or other pandemic aid for help.

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In February, the rate of arrears for high-risk car loans in arrears of more than 60 days rose to 4.15%, the highest since April 2020 (see chart below) for loans wrapped in asset-backed bond agreements, according to with Deutsche Bank.

“We are watching it very closely,” said John Kerschner, head of US securities at Janus Henderson Investors. “I would say let’s see what happens in the next two months.”

Unlike last year, the series of temporary pandemic assistance for homeowners, tenants and student borrowers has now ended or is about to end.

“No one believed that 2021 would be the norm in the future,” Kerschner said of the historically low consumer bankruptcy rates. high household savings. “Everyone knew it was kind of the best of all worlds.”

The percentage of overdue subprime car loans in bond agreements reaches 4.15%, the highest since 2020, according to Deutsche Bank.

German bank

Fitch Ratings also tracked February subprime ABS car delays to its highest level since April 2020, but at almost 4.8%.

While February data is the most recent, Margaret Rowe, senior executive in the Fitch Asset-backed securities group, said it was important to keep in mind that arrears for the same category were 5.2% on average. in 2019, before the pandemic.

“Certainly, the power outage from what we see for inflation could leave the subprime borrower more vulnerable,” Rowe told MarketWatch. “We expected to see the violations smoothing out or returning to these pre-pandemic levels.”

Why credit reports matter

Many investors are reluctant to take more risk this year, especially as more Fed officials call for an aggressive move higher this year to help reduce inflation to a 40-year high.

The S&P 500 SPX index,
-0.52%
fell 5.5% year-on-year to Wednesday, while the energy sector rose nearly 40%, according to FactSet, due to US CL00 oil prices,
-1.80%
over $ 114 a barrel.

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High-end borrowers often have credit scores in the range of 619 to 580, with those scoring below 580 being considered “deeply high-risk”, according to the Office of Financial Consumer Protection. High-risk loan interest rates can range from around 10% to more than 25%, according to a recent Consumer Reports studyfor less than 5% for many major borrowers.

Car lenders often move fast to recover vehicles when a borrower is in arrears. With used car prices up more than 40% from a year ago, the CFPB recently warned lenders not to jump the gun and recover illegal cars and trucks.

“Any bankruptcy will significantly affect someone’s credit,” said Francis Creighton, president of the Consumer Data Industry Association, a business group representing credit bureaus and agencies.

“If you’re subprime, dig deeper into a hole,” Creighton said by telephone. He also said that inflation and higher interest rates mean that consumers “will pay more for almost any type of credit” and should get the best possible interest rate. “That’s why we tell people to check their credit report.”

Consumers have until April 20 to request free, weekly credit reports from the three main vectors as a result of the pandemic. These reports were free only once a year, an aid to US households owed now a record $ 15.6 trillion in consumer debtt, as their balances increased by about $ 1 trillion in 2021, the largest annual jump since 2007.

“We believe that inflation is more likely to affect subprime borrowers due to lower incomes and / or savings,” BofA Global’s strategy team wrote in a weekly note. “This leaves the subprime auto ABS and consumer ABS lending sectors more vulnerable to credit crunch, which could put pressure on ABS valuations in the coming months, especially at a reduced collateral level.”

For now, however, Kershner said a strong job market is helping consumers, even as rates rise and the cost of living is higher. The other thing is that subprime car bonds, which would be the first in line for losses, do not show significant levels of stress or widening margins, suggesting credit concerns from investors.

“Everything is expanding, but on a percentage basis the top AAA categories are expanding more,” he said. “I would be more worried if they broke out like in 2020 at the start of COVID.”

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