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'It's getting worse': An increasing number of Americans have stopped paying their car loans

old scrap car junkyard
Wikimedia Commons

  • Losses on subprime auto loans have spiked in the last few months, according to Mizuho.
  • That could spell bad news for US carmakers, consumers, and the economy.

The number of Americans who have stopped paying their car loans appears to be increasing — a development that has the potential to send ripple effects through the US economy.

Losses on subprime auto loans have spiked in the last few months, according to Steven Ricchiuto, Mizuho's chief US economist. They jumped to 9.1% in January, up from 7.9% in January 2016.

"Recoveries on subprime auto loans also fell to just 34.8%, the worst performance in over seven years," he said in a note.

"It's getting worse," Ricchiuto told Business Insider.

That could spell bad news.

Cars, consumers, and the economy

First, the rising losses spell bad news for the US auto industry, according to Ricchiuto, as borrowing costs for consumers to buy cars could increase. Rates are already heading north, with the Federal Reserve expected to hike this week. Libor, a measure of financing costs, is at its highest level since 2015, and the yield on the two-year Treasury note has spiked, doubling in six months.

Screen Shot 2017 03 14 at 4.23.19 PM
Mizuho

That means financing costs for auto loans would increase, regardless of loan performance. But with subprime auto losses spiking, suggesting that auto loans are becoming riskier, investors are asking for a bigger spread than before, doubling the effect on financing costs.

That's where the potential impact on automakers comes in.

"The movement up in Libor, movement up in spreads, it should take a chunk out of demand," Ricchiuto said. "The monthly cost goes up."

If monthly costs go up and demand falls, automakers could feel the effect on sales. The inventory of unsold vehicles is at the highest level outside of the financial crisis, according to Ricchiuto.

"Every day you look at this, it comes out not looking particularly pretty," he said.

For consumers, the statistics hint at stressed finances. In November, the New York Fed's Liberty Street Economics blog looked at the deteriorating performance of subprime auto loans and set off the alarm.

"The data suggest some notable deterioration in the performance of subprime auto loans," Fed researchers said in a post. "This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments."

Then there is the effect on the broader economy. Ricchiuto said in a note (emphasis ours):

"The upturn in the domestic auto industry since the government bailed out GM and accommodated the merger between Fiat and Chrysler has been a mainstay of the economic recovery and expansion. Auto sales have exceeded all other consumer-related purchases and account for the bulk of the economy's upside since the turn in June 2009. This dynamic is likely to be tested in the weeks ahead as forward rates take on reduced Fed accommodation and lenders face rising losses on loans and leases made to subprime auto borrowers."

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