CHICAGO–A greater share of people with low credit scores has been falling behind on their car payments in recent months, indicating the stress being felt by consumers hit hardest by the pandemic, according to new data from TransUnion.
Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to TransUnion data analyzed by the Wall Street Journal. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019, the Journal noted.
More than 9% of subprime auto borrowers were more than 60 days past due in the fourth quarter, the highest quarterly figure in data going back to 2005.
“The missed payments are increasing in what has otherwise been a period of relatively low consumer delinquencies, with stimulus payments, unemployment benefits and other measures keeping many borrowers afloat,” the Journal reported. “The rising subprime delinquencies point to an uneven economic recovery and a deep divergence between those who can navigate the coronavirus downturn and those who can’t.”
Seeing the ‘Separation’
“We are seeing the separation between the consumers who are back on their feet and those who aren’t,” Satyan Merchant, head of the auto-finance business at TransUnion, told the Journal.
The Journal analysis noted auto loans are a key indicator of how riskier borrowers are faring, as the loans represent the biggest monthly debt payment for many subprime borrowers, who often don’t have mortgages or college debt. Many work in restaurants, hotels and bars that have been hit hard by COVID-19.
One problem for many subprime borrowers is they have low credit scores and can only find credit through payday lenders and similar offers, which means high interest rates and higher payments.
Subprime financing accounted for about 19% of the number of auto loans and leases originated in 2020, down from roughly 22% a year prior, according to Experian PLC.
“That decline has contributed to the increasing proportion of subprime delinquencies. With fewer subprime loans being made, the delinquent borrowers make up a bigger share of the subprime pool,” the Journal reported.
The share of borrowers with midrange to near-perfect credit scores who have missed auto-loan or lease payments remains close to 0%, according to TransUnion. Subprime delinquencies could improve in the next few months with tax refunds and the new round of stimulus payments and if the unemployment rate continues to fall, the report added.