Subprime Car Loan Defaults Hit an All-Time High in February

Used cars on display at K&L Auto Expert on May 06, 2022 in Richmond, California. Photo: Photo by Justin Sullivan (Getty Images)

The good times of easy credit seem to be coming to a close as subprime borrowers are increasingly falling behind on payments. That scary trend is happening on debts ranging from credit cars to vehicle loans. Car loan defaults hit 8.8 percent in February, a 15-year high, according to Equifax.

The Wall Street Journal reports that many folks actually boosted their savings and paid down debt during the pandemic, thanks in part to stimulus payments and child tax credits (proving once again that, with just a little breathing room, most lower-income people act responsibly, paying their bills and saving up). But that short-term trend, coupled with banks’ desire to get the economy moving again, led to easy lending.

That breathing room is long gone. Despite strong employment and rising wages, consumers are being hit by high gas prices, car prices, housing costs and general inflation across the board. And that has banks concerned — not about people’s wellbeing, but about their ability to get paid, of course. From WSJ:

There is also a broader concern among some lenders about the ability of consumers overall to keep up with payments when some of their financial benefits, including excess savings that they accrued during the early stages of the pandemic, taper off.

Wells Fargo & Co. Chief Executive Charlie Scharf said Tuesday that higher prices for food and gasoline will constrain U.S. households. “We are still in the best credit environment we have ever seen in our lives,” Mr. Scharf said at The Wall Street Journal’s Future of Everything Festival. But, he added, “There will be deterioration in people’s ability to pay.”

Subprime lending hit record levels last year, buoyed on pent-up consumer demand and high employment. As always happens with subprime lending, what goes up must inevitably come down. Lenders aren’t really worried. There are still fewer Americans with “subprime” credit scores today, compared to when the pandemic began: 18.6 percent before 2020, verses 15.5 percent now. Bank officials told WSJ that current delinquency rates are a market correction from artificially low levels.

Subprime lending is too often predatory, and puts desperate poor people in an impossible position. It’s a business that won’t go away any time soon, though, because subprime lenders make money whether borrowers pay or default.