Delinquencies Rise for Subprime Auto Borrowers: Is a Downturn Ahead?

A peak in delinquencies by subprime borrowers is adding to concerns that the current strong automotive sales cycle in the U.S. could be facing obstacles. 

Fitch Ratings reported that the rate of subprime automotive loans overdue by more than 60 days rose to 5.16% in February. It's the highest rate in the post-financial crisis period, second only to a 5.96% rate in October 1996, Fitch said. 

The high rate is troubling to credit analysts who noted that the packaging of auto loans into bonds and the sale of those securities to investors recalls the events that led to the mortgage and housing crisis in the middle of the past decade. 

"What's driving record auto sales is not the economy, but record auto lending," Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York, told The Wall Street Journal. Weinger has been betting against some auto lenders, who he said have lowered underwriting standards. 

But others said such fears are overblown, with the U.S. economy growing, unemployment down and fuel prices moderate. Still, with the U.S. auto industry having posted six straight years of annual gains, the first time for a streak of that length, some forecasters are referring to a "plateau" in sales, this year and next. 

Equifax reported that outstanding auto loans have topped $1 trillion in the U.S., a fifth of that amount going to subprime borrowers, the credit category for those with the lowest credit scores. Subprime borrowers also pay the highest interest rates -- sometimes as high as 20% -- and usually are the first to be delinquent. 

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