Auto-pocalypse? Americans are falling behind on their car payments

In September, Creditnews reported a worrying surge in auto loan rejections. Now, six weeks later, top-three credit agency Fitch Ratings is sounding the alarm on the auto lending market.

The percentage of subprime auto borrowers at least 60 days behind on their car payments rose to 6.11% last month.

The figure eclipsed the previous record set in January and the highest since record-keeping began in 1994.

Fitch Ratings blamed higher car prices and rising interest rates for the spike in delinquencies. “The subprime borrower is getting squeezed,” Margaret Rowe, a senior director with Fitch, told Bloomberg.

“They can often be a first line of where we start to see the negative effects of macroeconomic headwinds.”

“Macroeconomic headwinds” is just a fancy way of saying that people with poor credit history are having a harder time paying down their loans because they already pay some of the highest interest rates in the market.

Just how much they pay compared to other borrowers is eye-popping.

Understanding the subprime squeeze

A subprime borrower is anyone who lenders consider to have a relatively high credit risk. They can still qualify for loans but usually pay higher interest rates and fees than other borrowers.

Subprime is no small category.

A pre-pandemic study conducted by Experian found that more than one-third (34.8%) of Americans fall into this bucket.

The picture improved somewhat in 2021, but that was before the Fed pushed interest rates to 22-year highs and Americans added over $1 trillion to their credit card balances.

According to Experian, subprime borrowers pay an average rate of 11.53% for new cars and 18.55% for used cars.

By comparison, borrowers with good credit pay 5-6% for a new car and 7-9% for their used vehicle.

A slippery slope

Falling 60 days behind on a car payment puts borrowers on a dangerous path to having their cars repossessed, which usually happens after 90 days.

Car repo rates are expected to rise this year, with Cox Automotive forecasting 1.5 million seizures in 2023—up from 1.2 million in 2022.

Cox warned of rising repo rates in a July report but stopped short of issuing a “red alert” because it said the economy and consumer finances were strong.

That was before economists warned of a “quadruple shock” facing consumers in the fall.

The report also didn’t factor in surging auto insurance rates that are making it harder for people to manage their finances.