Subprime Car Loan Defaults Rising

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Facts about car financingIn March, 8.5% of subprime borrowers defaulted on their car loans, according to Equifax. That’s the second-highest total on record.

The Wall Street Journal reported, “Consumers with low credit scores are falling behind on payments for car loans, personal loans, and credit cards, a sign that the healthiest consumer-lending environment on record in the U.S. is coming to an end.”

Related: Top 5 Facts About Car Financing

Some Americans saw their savings improve during the first year of the COVID-19 pandemic. Unemployment spiked, but government stimulus payments and the short-lived child tax credit created new financial breathing room for those who remained employed.

As a result, Equifax said, fewer Americans have subprime credit scores — scores below 600 — today than in 2020. By November, car loans were as easy to get as they had been before the pandemic began. But, amid worries about a recession, subprime borrowers are starting to fall behind on rising payments.

Related: Upside Down on a Car Loan? Here’s What to Do.

Car loan and lease delinquencies hit a record in February, Equifax said, with 8.8% of borrowers 60 or more days behind on payments. The total dropped slightly for March — the most recent month for which data is available.

But gas prices began their current spike that month, raising alarm that fewer Americans would be able to keep up with their payments. Inflation concerns led the Federal Reserve Board to enact its largest interest rate increase in 22 years earlier this month.

Each 1-point increase in interest rates raises the average monthly car payment by about 3%.

Related: What The Fed Interest Rate Increase Means for Car Shoppers

 

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