Auto loan delinquencies: What do they really mean?

Hey, everyone. Thank you for sharing your feedback on my new format of the newsletter. My inbox is still open if you want to share your two cents.

Here’s a stat that blew my mind to kick off today’s packed edition: 17% of dealers fell victim to cyberattacks in the past year alone. 17% in just one year. So here’s your regularly scheduled reminder to train your teams on phishing scams…

 —CDG

Was this email forwarded to you? Subscribe here to get weekly insights on the auto industry and what makes it tick.

Today’s Biggest News

The Real Story Behind Record Auto Loan Delinquencies

By now, tons of folks in our industry have already gotten word of this startling stat: The share of subprime auto borrowers who are 60+ days past due on their loans rose to 6.11% in September. That’s the highest percentage of subprime delinquencies we’ve seen since this data started getting tracked 30 years ago.

How’d we get here?

• Rising interest rates have made newer loans pricier (to go along with rising car prices). For borrowers with high credit scores, rates are about 5% for a new car and 7% for a used car. For subprime borrowers, those rates are 14% and 21%, respectively.

• Borrowers have more on their plates—inflation is still a burden, and the economy is sending mixed signals about consumer spending.

• And many dealers are telling me that they’re dealing with unprecedented increases in auto insurance premiums—mainly driven by an increase in auto insurance fraud and rising costs of vehicle replacement and repair—and that it’s contributing to a surge in voluntary repos.

All signs point to potentially concerning news that I'm tracking very closely—and auto loan performance will likely continue deteriorating before it eventually gets better.

But…there’s more to this than meets the eye. While subprime borrowers have fallen behind on loan payments at record rates, borrowers classified as prime and above haven’t changed behavior much (if at all). And their delinquency rate in September was just 0.27%.

Take a look at this chart detailing the difference between subprime and prime auto loan delinquency →

So what does that tell us? Mostly that context matters. This record (as concerning as it is) isn’t representative of the entire auto lending industry. FYI, only about 14% of total outstanding auto loan balances are subprime—subprime lending is a high risk, high reward, but relatively small portion of the auto business.

Still, this week’s delinquency record raises an important point about subprime borrowers: The concentration in delinquencies for this borrower group suggests they are being pushed out of the market as Covid-era trends reverse course. For example:

1. Back then → $5 trillion of pandemic government stimulus plus a pause in student debt collection gave borrowers extra cash in their bank accounts. But now → Those same borrowers can’t afford monthly payments now that stimulus has dried up, student loan repayments are back on, and tax refunds from the spring have largely already been spent.

2. Back then → Lenders with lenient credit policies were offering loans to people who otherwise might not qualify. But now → Subprime borrowers can't get approved for loans (even high-interest ones) with banks tightening their credit policies.

3. Back then → Credit scores were artificially inflated by Covid funding, making otherwise subprime borrowers more attractive to lenders. But now → Those credit scores have come back down to Earth.

Bottom line: This trend in subprime delinquency is significant, but there are certain elements of this week’s record that appear to be standard normalization. For context, September saw 6.1% of subprime borrowers 60+ days past due on their loans. And while that is a record, it’s only a hair higher than the 5.9% of subprime borrowers 60+ days past due on their loans in August 2019…well before Covid-19 flipped this industry on its head.

This Week’s Episode of the CDG Podcast

Could you start a dealership with $40K? Brandon Miller, Founder of Miller Auto, did just that. So how does he pull it off (and sell Teslas in the Midwest)? Brandon told me all about how he got started, the marketing and auction strategies that set his business apart, and his POV on interest rates impacting the industry in this super informative episode of the CarDealershipGuy Podcast.

Listen to the episode here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts.

Advertise with CDG

Want to get your brand in front of 50K+ dealers, investors, and auto enthusiasts? Partner with the CarDealershipGuy newsletter to tell the people who matter most more about your business and big ambitions. Your ad will go right here in a future newsletter. Interested? Fill out this form and we’ll be in touch.

Trends to Watch

Is the market slowing? Dealers say so.

I polled my Twitter followers and the general consensus for this month so far? It’s rough out there, especially given insurance premiums and affordability issues. New sales are slow, used are moving a little faster (but with some price changes). For some, it’s been the worst month of the year.

Worth noting, though? Some outlier dealers are doing big numbers this month. What’s your experience been if you’re a dealer? Hit reply and tell me what you’re seeing out there.

Strike Update

The UAW’s strategy of targeting automakers’ most profitable vehicles and plants continues—the union told 5,000 workers to shut down production at GM’s largest US factory in Arlington, Texas, earlier this week. Already, the UAW has struck both Ford and Stellantis’ largest US factories.

Also this week? GM reported Q3 earnings and said the strike 1) was partially to blame for a 7% annual decline in profit and 2) has cost GM $800 million so far. Ford reports Q3 earnings after the market closes today—I’ll be watching.

So when could this all end? Hard to say—plenty of smart people are suggesting the end isn’t really in sight. But…there are whispers that this decision to up the stakes could be the UAW attempting to push automakers as far as they can one last time before a deal is reached.

The Backlot

• Cruise is pausing operations of its driverless AVs in San Francisco after the state of California suspended its driverless permits.

• Hyundai is building a plant in Saudi Arabia, joining Lucid in putting down roots in one of the world’s biggest oil hotspots. 

• The Japan Mobility Show kicks off today. We’re keeping an eye on how Japan’s auto industry is fragmenting into Toyota and Honda…and everyone else.

• The US Dept. of Justice has been investigating Tesla over its full self-driving tech, the range of its vehicles, and some “personnel decisions” at the company.

• Lucid fell short of Q3 expectations, delivering just 1,457 of its Air sedans in the third quarter.

• US assembly plants are being underutilized—they’re at a 66% utilization rate and the optimal rate is closer to 80%. The transition to EVs isn’t helping things.

Thanks for reading. Have some thoughts about auto loan delinquency or anything else I covered today? Hit reply and tell me what’s on your mind. See you next week.

—CarDealershipGuy

Want to advertise with CDG? Click here.

Want to be considered as a guest on the CDG podcast? Right this way.

Want to pitch a story for the newsletter? Share it here.