Auto loan delinquencies tick up as inflation hits nonprime borrowers

After two years of largely staying on track with their auto loans, borrowers are starting to miss payments again. 

The deterioration in auto loan quality is happening faster among consumers with nonprime credit scores who are being hit harder by inflation and have less money to put toward their auto loans every month. 

So far, auto loan delinquencies remain below pre-pandemic levels, thanks in part to the lingering effects of stimulus measures and savings buffers that some customers accumulated. But the uptick in delinquencies may be a sign that the stellar credit environment for lenders is starting to turn, raising the possibility of losses on loans they’ve made.

Auto loan losses for lenders remain at extremely low levels, but there is “obvious stress for nonprime consumers,” who are more vulnerable to inflation, said Kevin Barker, an analyst at Piper Sandler. Credit quality is “holding up better” at banks than nonbanks, which play a larger role in the subprime auto market, Barker said.

Roughly 7.25% of nonprime auto loans in May were marked as delinquent between 30 to 59 days, up from 5.20% a year earlier, according to new data from the credit rating firm KBRA’s auto loan indices. The indices track auto loans that were securitized and sold to investors.

Delinquencies have been ticking up since April 2021, and though tax refunds helped drive a slight improvement earlier this year, KBRA believes that effect will be temporary.

“We expect these seasonal tailwinds to dissipate next month and for inflationary pressures to place upward pressure on loss and delinquency rates as we enter the summer months,” KBRA analyst Brian Ford wrote in the firm’s latest report.

Borrowers with prime credit scores are also seeing delinquencies rising, with 0.82% of loans marked as 30 to 59 days late in May, compared with 0.6% in May 2021, according to KBRA.

Lenders have long been expecting their exceedingly strong credit metrics to gradually return to more normal levels, and they are expected to share updates as they report their quarterly earnings starting next month. 

At Ford Credit, the financial services arm of the U.S. automaker, delinquencies are starting to increase and appear to be “reverting back more towards the mean,” Ford Chief Financial Officer John Lawler said last week. 

“We are seeing some headwinds there a little bit when it comes to delinquencies as maybe a leading indicator,” Lawler said at a Deutsche Bank auto industry conference, but delinquencies are “not yet a concern” given they have been so low during the pandemic.

Those delinquencies could turn into something more worrying for auto lenders, who may eventually start recording more losses on their balance sheet by charging off loans they can’t collect on.

Net charge-offs have remained extraordinarily low for auto lenders in the past two years, which partly reflects the benign credit environment. But the skyrocketing prices for used autos have also helped keep net charge-offs subdued, Moody’s analyst Inna Bodeck said. 

Prices for used cars — which have been in high demand after a chip shortage hampered production of new cars — were up by 16.1% in May compared with a year earlier, according to the Bureau of Labor Statistics’ latest inflation report.

Higher used-auto values has meant that cars are worth more when they are repossessed, raising the amount that lenders recover and therefore helping offset charge-off amounts.

Once prices come back down, net charge-offs will likely become “a little bit more pronounced,” Bodeck said.

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