The squeeze in auto loans is unlikely to threaten the wider financial system, analysts said.More Americans are struggling to make their monthly car-loan payments, a sign that lower-income consumers are under growing financial pressure.
The share of subprime auto loans that were 60 days or more past due reached a high of nearly 6.5 per cent in January and has lingered near that level, according to Fitch Ratings. Repossessions have swelled, more drivers are trading in vehicles that are worth less than they owe, and lenders such as CarMax and Ally Financial have warned investors about auto loan performance.
Despite stubborn inflation and punishing tariffs, the US economy on its surface has appeared to hold up relatively well. The stock market continues to climb, company executives for the most part remain upbeat, and consumers overall are still spending.
But the weakness in the auto market is one of the clearest indications that low- and middle-income families — the economy’s foundation — could be starting to buckle. Because many Americans need their cars to get around, auto loan delinquencies can be a telling gauge of financial hardship.
“Is this evidence that we have some consumers under stress?” asked Jonathan Smoke, chief economist at Cox Automotive, a research firm. “I would say yes, most definitely.”
Borrowers with higher credit scores are also showing evidence of strain. Roughly 2 per cent of all auto loans were significantly overdue last month, slightly more than a year ago, a Cox Automotive analysis of credit data showed. And researchers at the Federal Reserve Bank of New York found that the rate at which loans transitioned into delinquency has been rising for borrowers across ZIP codes and credit score bands.
Since 2021, prices for goods including cars have climbed, and higher interest rates have made borrowing more expensive. Pandemic-era savings have been depleted. The boom in wage growth for the lowest-paid workers has subsided. A once-ebullient job market has started to slump.
Compounding those challenges, student loan payments, which were paused during the pandemic, have resumed. Student loan delinquencies also returned to credit reports, depressing credit scores.
The squeeze in auto loans is unlikely to threaten the wider financial system, analysts said. Auto loan balances in the second quarter accounted for less than 10 per cent of the $18.4 trillion in household debt, according to New York Fed data. Subprime auto loans are a fraction of total auto loans.
