More and more subprime borrowers are not repaying their loans

Consumers with low credit scores are falling behind on car loan, personal loan and credit card payments, a sign that the healthiest consumer lending environment ever in the United States is coming to an end end.

The share of subprime credit cards and personal loans that are at least 60 days past due is growing faster than normal, according to credit reporting firm Equifax Inc.

In March, these delinquencies increased month-over-month for the eighth consecutive time, approaching their pre-pandemic levels.

The rise in delinquencies was inevitable after they declined during the pandemic, many lenders and analysts said. Even so, the rise is catching investors’ attention in part because the Federal Reserve, facing the highest inflation since the early 1980s, embarks on what is expected to be a series of rate hikes. most brutal interest in years. Higher delinquency numbers may indicate stress on the part of consumers whose spending is a major driver of economic activity.

Fears that rising rates could push the economy into recession fueled the worst start to the year for stocks in decades. A poor earnings season for major U.S. retail chains heightened those worries this week, sending major retail stocks steeply lower and sending the Dow Jones Industrial Average to its biggest drop of the year on Wednesday.

Delinquencies on auto loans and subprime leases hit a record high in February, according to Equifax tracking dating back to 2007.

Many people, including those with less than perfect credit, have paid off their debts and accumulated savings during the pandemic, a surprising result given that lenders initially thought borrowers would default en masse when Covid-19 would hit. The government’s response, including stimulus payments and child tax credits, has improved the financial health of many families.

But now many of those benefits are exhausted. Subprime borrowers, who sometimes have lower incomes or less savings, are hard hit. Inflation, near its highest point in four decades, is also forcing many households to choose between paying for essentials and repaying their monthly loans.

Some lenders are also concerned more broadly about consumers’ ability to meet their payments when some of their financial advantages, including excess savings they accumulated during the early stages of the pandemic, dwindle.

Wells Fargo & Co. Chief Executive Charlie Scharf said Tuesday that rising food and gasoline prices will limit American households. “We’re still in the best credit environment we’ve ever seen in our lifetime,” Scharf said at the Wall Street Journal’s Future of Everything Festival. But, he added, “there will be a deterioration in people’s ability to pay.”

Rising subprime defaults could reduce lenders’ willingness to lend to riskier borrowers.

Lenders have kept their standards for mortgages relatively strict. A scorching housing market and a flood of mortgage applications meant lenders could be picky with their offers and the type of borrowers they approved.

But last year, many lenders embraced subprime customers for other types of loans, comforted by low unemployment and fueled by an eagerness to replenish loan balances that were hit early in the pandemic. Subprime loans hit record highs last year when measured by the total dollar amount of personal loans issued and spending limits on new general-purpose credit cards, according to Equifax.


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According to the latest available data from Equifax, some 11% of general purpose credit cards held by consumers with credit scores below 620 were at least 60 days past due in March, up from 9.8% a year earlier. previously. Personal loans and lines of credit in arrears were 11.3%, compared to 10.4% the previous year. Both categories hit Covid-19-era lows of 7.5% and 8.3%, respectively, in July.

Car loan and lease delinquencies hit a record high in February, according to Equifax tracking, with 8.8% of subprime accounts at least 60 days past due. This figure fell slightly to 8.5% in March, but it was still the second highest level on record.

Fewer people are in subprime credit tranches than at the start of the pandemic. Some 18.6% of American adults with credit scores had a score below 600 in 2020, up from 15.5% last year, according to Fair Isaac Corp.

creator of FICO scores.

Americans have massively increased the amount of credit they have taken out this year. With prices set to continue to rise, this could be a warning signal for the economy. The WSJ’s Dion Rabouin examines these trends and explains what they tell us. Photo composition: Elizabeth Smelov

Lenders say defaults are rising from artificially low levels and their credit portfolios remain strong overall. Many are calling what is happening a normalization, where delinquency rates return to levels more in line with the pre-pandemic period. Some say their delinquencies remain below their levels in the first quarter of 2020.

Capital One Financial Corp.

recorded a 30-day or longer delinquency rate on credit cards in the United States in the first quarter compared to a year earlier. Lender Bread Financial Holdings Inc.

also reported a higher delinquency rate for its cards and other loans for the quarter. Both lenders issue credit cards to subprime borrowers. Other major card lenders did not see the increase for the year-over-year period, said Michael Taiano, senior group director of US banks at Fitch Ratings.

“It wouldn’t be natural for credit to stay where it is,” Capital One chief executive Richard Fairbank said in the bank’s latest earnings call. “We would expect it to be some sort of generalized return to normal over time.”

Assets received Inc.,

Financial Opportunity Corp.

and One Main Holdings Inc.,

which facilitate or provide personal loans to people with limited credit histories or low credit scores, also reported an increase in delinquencies in the first quarter.

Upstart said on its earnings call last week that government stimulus has caused consumers to temporarily outperform. It recently reintroduced loan modifications for borrowers who are struggling to keep up with their payments.

Consumers face a mix of rising gas and rent prices, while job and wage growth remain strong, Raul Vazquez, chief executive of Oportun, said in an interview. “How it all comes together, we’re all going to see in the next few months.”

Write to AnnaMaria Andriotis at [email protected]

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