Upward trend in delinquent auto loans
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It had to happen. Witnessing the negative effects of the pandemic on some consumers, some borrowers are dangerously behind on their auto loans. They are known as subprime or risky borrowers. Many lenders define this category of people as having a credit score of 600 or less. Although the loans come with a high interest rate, they are the only option for many auto buyers.
Industry experts point out that auto loans represent the largest monthly debt payment for many subprime borrowers, most of whom do not have mortgages or university loans. Significantly, many of them are often employed in restaurants, hotels and other travel and leisure establishments, all of which have been particularly affected by the pandemic.
The latest available data, released for the month of February, indicates that nearly 11 percent (10.9 percent) of subprime borrowers with outstanding auto loans or leases were more than 60 days past due. The rate rose from 10.7% in January to 8.7% in January 2020. And February represents the sixth consecutive monthly increase in delinquencies.
In response to the coronavirus pandemic, federal relief measures have been granted for federally guaranteed mortgages and federal student loans. But the programs did not extend to auto loans, credit card loans, or personal loans.
The sole discretion as to whether to defer payments for subprime borrowers rests with banks and other lenders. Many extended deadlines for their clients can be up to three months. Even with deferred payments, however, many subprime borrowers – out of work and with little to no savings – have not been able to stay up to date on their loans, and their vehicles have been repossessed by lenders.
Another factor affecting the default rate of subprime loans comes into play. As the pandemic accelerated, banks and other lenders raised their lending standards, making it more difficult for subprime borrowers to obtain credit. credit. While subprime loans made up about 22 percent of total loans and leases in 2019, this figure fell to 19 percent in 2020. This has contributed to the increase in the proportion of subprime delinquencies.
Subprime borrowers are among the most vulnerable in society. Their finances have been hit hard by the pandemic and most are living paycheck to paycheck. They have little or no savings, no jobs, and no debt relief.
The greatest hope of this group is that the economy will accelerate and lead to the complete opening of all establishments. Once that happens, we hope that the borrowers at risk find jobs.
Wayne Curtis, former Alabama banking superintendent, is a retired Troy University Business School Dean. Email him at wccurtis39 @ gmail.com.