Auto loan delinquencies rise sharply among subprime borrowers

Auto loan delinquencies rise sharply among subprime borrowers
Some 23 million people with credit scores under 620 have subprime auto loans. They are much more likely to lose their vehicle to the repo man.

Nearly one in 10 car loans made to borrowers with bad credit was delinquent by 90 days or more in October, according to a new report on household debt by the Federal Reserve Bank Of New York.

The market for so-called subprime auto loans is dominated by finance companies who have lower underwriting standards and charge much higher interest rates. The New York Fed found that the delinquency rate for finance companies was 9.7 percent, compared to 4 percent for traditional banks and credit unions that offer subprime loans.

Some 23 million people with credit scores under 620 have subprime auto loans. They owe a total outstanding balance of nearly $300 billion. About two-thirds of that debt is held by finance companies — a share that has almost doubled since 2011.

In a blog post that accompanied the report, Fed analysts said the sharp rise in delinquency among finance company borrowers is masked by the steady decline overall in auto loan defaults.

“The subprime delinquency rates are really where the pressure is,” they wrote. “The delinquency rate — even among borrowers in the same credit score bucket — is considerably higher and rising on the auto finance side.”

All told, data on loan originations suggest lending to the least credit-worthy borrowers has slowed in the last year. Loans in the third quarter to consumers with credit scores under 660 fell 8.3 percent, while they rose 5.4 percent for borrowers with higher scores.

Still, one in five new car loans go to borrowers with a credit score below 620, according to the Fed report. And while unemployment is low, the latest data suggest many of these people are still struggling to make ends meet.

“These consumers may find their credit reports further damaged after a default or encounter further financial difficulties after experiencing a car repossession,” they said.