How is Unpaid Car Debt impacting our Economy?
December 28th, 2017 by Bunch & Brock
The record-setting U.S. auto industry is a shining star against the backdrop of an underwhelming U.S. economy. But is it being set up for a fall by lenders who make risky loans to consumers with poor credit? The fact that a growing number of low-credit consumers are having trouble making their payments could suggest that all is not well in the car loan market.
Since early 2016, when the loan market hit the one trillion dollar cumulative value, observers inside the auto industry and analysts outside it have debated – sometimes heatedly – about the fairness of comparing today’s subprime auto loan practices to the lending practices which led up to the housing bubble that triggered the Great Recession of 2009. Much of the unease is because of auto loans and their availability to folks who sometimes cannot pay their loans off . It’s reasonable to think that a pullback of low-credit loans could cause creditors to “overcorrect” and produce a domino effect that might impact the entire U.S. Economy.
A couple of indicators suggest that the industry is correcting itself. The U.S. outstanding auto loan debt surged in the last half of 2016 to finish at around $1.2 trillion, according to the New York Fed Consumer Credit Panel (NYFCCP) which is based on Equifax credit data. That number capped a heady rise of nine percent in 2015, and a cumulative rise of 13 percent above the recession peak in 2005, adjusted for inflation. But by the end of 2Q 2017, that $1.2 trillion debt eased back to just under $1.1 trillion.
Even though total household debt increased by $116 billion to reach $12.96 trillion in the third quarter of 2017, according to the New York Fed’s Center for Microeconomic Data, lending to borrowers with lower credit scores seemed to be running out of steam as 2017 progressed, even as lending to borrowers with higher credit scores remained vigorous.
Outstanding subprime auto debt (that which is held by borrowers with origination credit scores under 620) now stands at about $300 billion, according to NYFCCP. As a share of the total outstanding auto loan balance, it has remained consistent at approximately 24 percent since the recovery began in 2011. Subprime loans are disproportionately originated by auto finance companies, and their share has nearly doubled since 2011 – a little over $200 billion. Outstanding balances of bank-underwritten auto notes remain dominated by loans to borrowers with higher credit scores, comprising a little over half of the current $1.1 trillion cumulative auto loan debt.
SubPrime Auto Loan Markets Are a Concern
Since 2011, the 90+ day delinquency rate for bank auto loans has been steadily improving. But auto finance companies’ delinquency rates have noticeably increased by over two percentage points since 2014.
More than 23 million consumers hold subprime auto loans. This is a large share of the total market, but probably not enough to topple it. However, the high percentage of them that are paying auto finance company loans does bear watching as they could impact the health of the auto industry as a whole. Nevertheless, it would seem, this “shaky” segment might not be enough to seriously hurt our overall economy by itself.
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