Record Auto Delinquencies Have Subprime Lenders Worried

Record levels of late car payments is putting pressure on subprime auto lenders.

That’s according to a Friday (Nov. 14) report by Bloomberg News, which said this is happening in the wake of the recent collapses of Tricolor Holdings and PrimaLend Capital Partners.

The number of risky borrowers who were at least 60 days behind on their car loans climbed to 6.65%, the report said. That’s the highest level in more than 30 years, per Fitch Ratings.

According to the report, this increase in delinquent car payments signals increased strain among consumers with the weakest credit, many of whom are wrestling with rising car prices and steep interest rates.

The increasing risk premiums will drive up funding costs for many auto lenders, eating into their profitability and potentially leaving companies struggling to remain in business.

“The worry isn’t that the entire market is suddenly at risk but instead that the tougher economic environment and the fact we’re late in the credit cycle is putting pressure on the smaller, more fragile companies,” said Michael Hislop, an analyst at Curasset Capital Management.

He told Bloomberg that his company has reduced its exposure to the lowest-ranking subprime auto bonds, worried that banks could increase scrutiny of lenders and refuse to renew working capital lines used to fund auto loans.

Tricolor Holdings filed to liquidate in bankruptcy in September, facing allegations that it fabricated or double-pledged auto loans.

Another auto sector play, car parts supplier First Brands, also folded around the same time, with its bankruptcy coming amid questions about whether the company had pledged the same accounts receivable to different lenders.

Research by PYMNTS Intelligence from earlier this year found that 29% of subprime consumers had applied for and been denied a credit card, compared to 12% of their super-prime counterparts.

All the same, the same research has shown that subprime consumers are willing, and have been attempting, to seek out new ways to improve their credit. The approach is two-pronged, where these same consumers are using the credit they do have to handle how they pay for essential goods and services, and meet those obligations.

“Of the more than 2,300 consumers that we surveyed earlier in the year, the data shows that 57% of subprime borrowers have access to credit cards, and 21% use them to make essential purchases to improve their credit score,” PYMNTS wrote.