America's auto loan debt is at record levels, but most auto finance experts say strict lending criteria kept delinquencies in check in 2019.
Yet Cox Automotive believes those standards may not have been tight enough — and chief economist Jonathan Smoke sees a fallout among subprime borrowers on the horizon.
Record-high delinquency rates in November and December signal more consumers will fall behind on car payments in January and February. To compensate, auto lenders may restrict credit access further for subprime borrowers in 2020, Smoke said.
The severe delinquency rate, meaning 60 days or more past due, for auto loans reached a record high of 5.48 percent in November, Smoke said, citing Equifax data. The latest delinquency rate is higher than the highest recorded during the Great Recession.
"When November is bad, it's guaranteed that December, January and February are going to be worse," Smoke said.
December was, in fact, worse — the severe delinquency rate of subprime auto loans hit 5.52 percent. Prior to November and December's figures, the worst rate was 5.37 percent, in January 2009, Smoke said.
Delinquencies tend to peak in January and February due to seasonal spending patterns, Smoke said. Consumers typically take on more revolving debt during the holiday season, and as tax refunds are issued, consumers pay off debt or reduce balances during the spring.
Such high delinquency rates as early as November indicate more trouble ahead. Severe delinquencies could climb to 5.78 percent next month, an increase of 38 basis points over February 2019's rate, Smoke said.
"The new peak this year would mean more than 55,000 more subprime auto loans would be in severe default status compared to last year," he said.
To compensate for increased risk, lenders are likely to clamp down on subprime loans, with Cox noting the spread among interest rates charged on auto loans is growing relative to other market rates. In December, the average rate charged on new-vehicle loans for subprime borrowers was 18.8 percent, an increase of 240 basis points from December 2018.
"We are likely to see lenders be more restrictive in some ways like no longer lengthening terms, but the real challenge is just how high consumers can go with the rates before the payments no longer work," Smoke said. "In an economy with a 3.5 percent unemployment rate and high consumer confidence, there will be consumers seeking subprime auto loans."