NEW YORK – The hazard lights are flashing on subprime car loans.
Roughly six million auto borrowers with shoddy credit scores are at least 90 days late on making their loan payments, according to new figures released by the New York Federal Reserve. The percentage of delinquent subprime auto loans has raced to the highest level since 2010.
Since the end of the Great Recession, there’s been an explosion of auto loans, growing to more than $1.1 trillion. That, along with a far stronger economy, has helped fuel a boom in U.S. auto sales.
While Detroit’s sales slowed down earlier this year due to rising prices, General Motors and Ford on Thursday said sales accelerated in November. The industry is now back on track for record sales in 2016. It could be the eighth-straight year of increases.
But part of those sales may have been fueled by easy availability of credit for borrowers with poor credit, who are evidently now struggling to pay off those loans.
While the majority of auto loans are still performing just fine, the New York Fed said it has witnessed a “pronounced worsening” over the past year of subprime car loans that are late.
The Fed described it as a “notable deterioration” and called the problem a “significant concern.”
Specifically, the interest rate on 90-plus day late loans made by auto finance companies has increased by a full percentage point over the past four quarters. Auto finance companies are the source of the vast majority of subprime loans.
By comparison, the Fed said delinquency rates for bank and credit union auto loans have improved slightly. That makes sense given that the U.S. economy continues to grow and the unemployment rate remains low.
But the Fed warned of “declining performance” for banks that have higher subprime auto exposure.
It’s the latest note of caution about subprime car loans.
In February, Fitch Ratings warned that the rate of seriously delinquent subprime car loans it examines rose in February to the highest level since 1996.
That uptick has caught the eye of government regulators. The Office of the Comptroller of the Currency, a frontline bank regulator, warned in July of risks linked to the “unprecedented” growth in auto loans, rising late payments and shrinking used car values.
The OCC did not say though that the issue poses a serious danger to the financial system at large.
Jamie Dimon, the CEO of JPMorgan Chase, also recently said that while his bank has been cautious, auto lending looks “stretched.”
“Someone is going to get hurt,” Dimon said.
