Delinquency Rate at 9.3% in December Last Year
Carflation After COVID-19... Large Loans Taken to Buy Cars
Loan Repayments Fail as Interest Rates Rise
[Asia Economy Reporter Haeyoung Kwon] The delinquency rate on auto loans in the United States has soared to its highest level in 13 years. As interest rates rise, more people are unable to manage their loans. Although the labor market remains robust and there are even predictions that the U.S. economy will experience a soft landing rather than a mild recession, defaults are occurring primarily among vulnerable borrowers.
On the 19th (local time), The Wall Street Journal (WSJ), citing international credit rating agency Moody's, reported that as of the end of December last year, 9.3% of auto loans to subprime borrowers were delinquent by 30 days or more. The auto loan delinquency rate had fallen to 6.5% at the end of April last year but rose to 8.5% at the end of September and then to the 9% range by the end of December. This is the highest level since January 2010, shortly after the global financial crisis, when it was 10.2%.
Following the COVID-19 pandemic, supply chain disruptions triggered 'carflation' (rising vehicle prices), leading many car buyers to take out large loans to purchase vehicles. Loan conditions were also adjusted favorably for car buyers. According to a Federal Reserve (Fed) survey, in the first half of 2021, one in five banks relaxed credit standards for loan applicants, increasing installment auto loans. However, with the continuation of aggressive tightening policies last year, loan delinquency rates increased.
WSJ analyzed that although the U.S. labor market remains strong, the increase in auto loan delinquencies indicates that defaults are occurring mainly among those who have been unable to secure employment. According to Ally Financial, which provides auto loans, the rate of loans delinquent by 60 days or more in the fourth quarter of last year rose to pre-pandemic levels. Loans extended from mid-2021 to mid-2022 were primarily delinquent.
Subprime borrowers with credit scores below 660 were particularly vulnerable to stress. According to Moody's, the delinquency rates for auto loans were 5.066% for credit scores between 620 and 659, 8.933% for 580 to 619, 14.63% for 530 to 579, and 22.165% for 300 to 529. Pamela Fuei, a professor at the Cardozo School in the U.S., said, "Households beginning to face financial difficulties may have found it hard to maintain other obligations, including auto loans."
Borrowers who purchased vehicles in 2022, when car prices peaked, were hit hard. Recently, used car prices have fallen, reducing collateral value. According to the Mannheim Used Car Price Index, used car prices surged 47% in 2021 but dropped 15% in 2022. Although prices have risen for two consecutive months recently, they have not recovered the losses from last year. According to Cox Automotive, auctions due to auto loan defaults increased by 11% in 2022.
There are concerns that loan delinquencies centered on subprime borrowers could spread as a broader social issue. While the current labor market remains steady, if unemployment rises and jobs decrease in the future, the scale of delinquencies could expand further. WSJ stated, "If the U.S. falls into a recession as many economists predict, stress could spread," adding, "If job losses increase, many consumers will realize they cannot manage the debts they have accumulated over the past few years."
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