Consumer checkup: Auto loan delinquencies are on the rise again

Delinquency rates on auto loans increased in August in both the prime and subprime cohorts, according to Morgan Stanley.

Why it matters: The resilience of American consumers has been instrumental in preventing a recession. However, the weakening labor market is increasingly straining household finances, suggesting that the U.S. economy may not be able to indefinitely withstand economic threats.

By the numbers: 

• In subprime, 60+ day delinquencies were up 26 basis points month-over-month in August and 20 basis points year-over-year, coming in at 5.17%.

• In prime, 60+ day delinquencies were up by only 1 basis point from July and 9 basis points against last year, landing at 0.50%. 

Between the lines: Consumers with auto loans originated in the past two years are falling further behind versus those with loans from earlier years.

• Overall, subprime auto loans originated in 2023 are having a particularly tough time due to the elevated interest rates and high vehicle prices at the time. 

• Around 8.7% of all accounts are 30+ days delinquent, 3.2% are 60+ days delinquent, 1.25% are 90+ days delinquent, according to Bloomberg data.

What they’re saying: “Loans opened during 2022 and 2023 are, so far, performing worse than loans opened in earlier years, perhaps because buyers during these years faced higher car prices and may have been pressed to borrow more, and at higher interest rates," New York Fed researchers wrote.

Worth noting: Loss severities in auto-backed securities (the portion of the value of a bond, including unpaid interest, an investor loses in the event of default) within the 2023 vintage have been higher than those of the 2022 vintage in subprime. Losses in these two vintages in the subprime cohort are at the highest of any on record.

Bottom line: Rising delinquency rates, especially among subprime borrowers, are continuing to flash warning signs about the financial health of American consumers. With newer loans underperforming, the data suggest a growing risk that consumer strength may be running out of road.

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