Car Buyers Are Starting To Miss Payments At A Record Pace

America’s most financially risky car buyers are falling behind on their loans at a speed not seen in the last thirty years.

According to new data from Fitch Ratings, the number of subprime auto borrowers who are 60+ days delinquent on their car loans climbed to 6.65% in October—the highest level ever recorded since Fitch began tracking the segment in the early 1990s. A year ago, the delinquency rate was 6.23%, and in September it sat at 6.50%.

Reuters narrativizes that lower-income households are being squeezed by high interest rates, rising living costs, and depleted savings. Subprime borrowers—typically those with weak credit scores or limited credit histories—pay significantly higher interest rates as an offset to their higher risk of default.

With monthly payments now at record highs for both new and used vehicles, subprime borrowers are the least equipped to absorb financial shocks. While the mainstream auto market continues to show resilience in the current economic climate, the subprime segment is screaming loudly. In September, subprime auto lender Tricolor suddenly and spectacularly went bankrupt, throwing the used car financing ecosystem into chaos amid allegations of fraud and mismanagement.

But Tricolor isn't the only one—PrimaLend, a financer in the “buy-here-pay-here” used-car market, filed for bankruptcy last month.

Analysts are warning that if delinquencies continue to rise, lenders tied to subprime portfolios could face growing losses—something investors are increasingly wary of in today’s jittery credit environment. Prime borrowers show a mere 0.37% delinquency rate, which is unchanged from last year.

The widening gap between prime and subprime borrowers suggests that financial stress is concentrated among Americans living paycheck to paycheck. Even a modest used car can end up costing significantly more for a subprime borrower than the car is realistically worth due to the increased interest payment. Subprime borrowers often rely on their vehicle to get to their job, or multiple jobs in some cases, so having a vehicle is an absolute requirement.

Prime borrowers also see their car payment taking up much less of their overall monthly income due to the likelihood that they are higher-income earners. When the choice comes between putting dinner on the table for your kids or making a loan payment on that 2017 Dodge Journey, the loan will always lose.

As automakers and dealers push harder into certified used vehicles and extended financing terms, the health of the subprime market is critical.

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