Subprime Auto Borrowers Hit Record-High in Loan Delinquencies

Car owners are facing increasing difficulties in affording their vehicle payments, primarily due to higher car prices and rising interest rates. A concerning 6.1% of subprime auto borrowers are now at least 60 days overdue on their loans, marking the highest percentage since 1994, according to Bloomberg, citing data from Fitch Ratings.

This 6.1% figure represents a significant surge from the 2.6% reported in May 2021 when the federal government lowered interest rates in response to the Covid-19 pandemic. The combination of elevated vehicle prices, increased borrowing costs, and persistent inflation has driven this rise in delinquency rates on auto loans.

Federal Reserve officials anticipate that the high interest rates will continue until 2026, potentially prolonging the problem. Margaret Rowe, a senior executive at Fitch, stated that subprime borrowers can serve as an early warning signal for the adverse effects of macroeconomic challenges.

It appears that Generation Z and millennials may be disproportionately affected by this trend, as they experienced higher auto loan delinquency rates last year compared to pre-pandemic levels, according to NBC News, citing TransUnion.

Interest rates for used cars vary widely, with an average rate of 13.5% for those with fair credit and a staggering 21% for individuals with the worst credit, as reported by Bankrate.

The increase in car prices can be attributed, in part, to the ongoing computer chip shortage, a situation induced by the pandemic. JP Morgan predicts that certain chip shortages may persist until 2024, further impacting the automotive industry and potentially worsening the situation for car owners struggling with their payments.

Information for this story was found via Bloomberg, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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