The U.S. subprime auto loan default rate hits a record high, with high car prices and high interest rates increasing the burden

The auto loan default rate among subprime borrowers in the United States has risen to a record high, with low-income groups facing increasing financial pressure.

According to data from Fitch Ratings, as of October, the proportion of "subprime borrowers" who are more than 60 days overdue has risen to 6.65%, the highest level recorded since 1994. Ongoing inflationary pressures and the resumption of student loan repayments are forcing millions of car buyers to struggle to make their monthly payments.

"Subprime borrowers" refer to borrowers with poor credit qualifications. These borrowers are considered to have a higher risk of default, so financial institutions often charge higher interest rates or set stricter terms when issuing loans to them, such as auto loans and home mortgages.

Signs of deteriorating financial conditions for these consumers became particularly evident in September. As previously mentioned by Wall Street Insights, the used car dealer and subprime auto lender Tricolor suddenly announced bankruptcy, forcing large financial institutions with exposure to subprime borrowers to reassess the related risks.

Expansion of Subprime Borrowers

According to TransUnion data, the proportion of consumers with the worst credit conditions has increased this year, reaching the highest level since 2019.

In the third quarter, this type of subprime borrower accounted for 14.4% of all tracked consumers, up from 13.9% in the same period last year.

For many borrowers, finding stable employment is becoming increasingly difficult.

Economic indicators in September showed a slowdown in hiring and weakened labor demand. Companies like Starbucks, Target, and Amazon have recently announced layoffs. A report indicated that as of October, the number of layoffs in the U.S. has approached 1 million this year, the highest level for the same period since 2020.

Miriam Neal, a 29-year-old from Atlanta, lost her researcher job last December and was unable to pay her car loan, leading to her vehicle being repossessed.

She raised funds through the GoFundMe crowdfunding platform to redeem her vehicle but still struggles to pay her bills. She currently drives for Amazon Flex, earning about $100 a day, which is not enough to cover all her bills. She said:

I usually pay late by 30 days.

High Car Prices and Interest Rates Increase Burden

Consumers also face high auto prices and borrowing costs, leading to an increasing number of people whose loan balances exceed the actual value of their vehicles.

According to data from Edmunds.com, in the third quarter, over 28% of new car trade-ins in exchange for used cars had negative equity (i.e., loan balances higher than the current value of the vehicle), the highest level since the first quarter of 2021.

Meanwhile, the average price of new cars recently surpassed $50,000 for the first time. For the riskiest borrowers, high interest rates further exacerbate their financial burden.

Experian data shows that in the second quarter, deep subprime consumers, with credit scores between 300 and 500, had an average new car loan interest rate of about 16%, and a used car loan interest rate of 21.6%. Megan Langhoff, a 34-year-old resident of Genoa City, Wisconsin, is paying a 29.5% loan interest rate for her 2014 Kia Optima, with a monthly payment of $483. She works as a manager at McDonald's, and the interest rate at the time of purchase was 32%. She said:

My principal has hardly decreased over the past two years because once you fall behind, late fees accumulate, making it hard to catch up.

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