Late Auto Payments Worst in Over 30 Years

According to Fitch Ratings, subprime auto loans are in their worst state since 1993. The data shows that 6.65% of the loans were a shocking 60 days past due as of October. To put that into perspective, that’s roughly double the rate from just four years earlier. This shows that borrowers in the lower credit tier are seriously struggling.

When those living paycheque-to-paycheque combine with a low employment rate, this means that their debts quickly become unmanageable. Auto loans are the 2^nd biggest consumer debt (mortgages being 1^st) and can be a clear warning sign for America’s economic machine.

According to CNBC, Cox Automotive claimed that the average price paid for a new vehicle just passed US$50,000 for the first time ever. Many articles covering this data highlight that it may be signs of a “K-shaped economy”, meaning that the rich are able to buy more expensive vehicles while the poor are relegated to not buying or stretching their credit.

Breaking it down to a rich vs poor dichotomy, plus focusing on the average price rather than total sales, seems a bit contrived. For example, if any asset starts becoming more expensive due to inflation, that could lead to fewer people buying it despite their financial situation. Here’s an example: If a cafe sold coffees for $6 each, then inflation and other economic pressures forced them to raise prices to $15 each, instead of stating that they are struggling and now selling much less coffee except for a handful of high-income people desperate for a coffee, they can brag that their average sale price went up to $15. In a way, this is a deceptive way of analysing the data.

The point is, it is easy to focus on a rising average (isn’t rising price usually a bad thing?) or try to write off these issues as only affecting a certain class of borrowers, but the economy is all interconnected. The Consumer Federation of America backs this up with a statement that US auto financing is at a “breaking point”, highlighting the US$1.66 trillion of debt that Americans have. The Consumer Financial Protection Bureau has also received a record high number of complaints about auto loans. Finally, the NY Fed already announced last year that they found buyers who had above-average credit scores were two times as likely to fall behind on payments compared to pre-2020.

In the investing world, analysts have been keeping a close eye on this data and using it to gauge risk. The US stock market has had repeated surprise downturns, despite maintaining its rough trajectory, but the warning signs have been compounding. Gold’s retracement was very quickly bought back up and has so far formed a V-shaped recovery.