The Rise of Subprime Auto Loan Delinquencies Post-Pandemic

The subprime auto loan market is facing significant challenges that reflect broader economic pressures. As inflation continues to rise and interest rates remain elevated, borrowers are experiencing increasing financial strain. Rising delinquency rates and high loan-to-value (LTV) ratios suggest that many consumers are overextending themselves financially. Additionally, a decline in new subprime loan originations indicates that lenders are tightening their credit standards in response to these risks.

Delinquency rates surged to 8.5% in August, compared to 8.2% in July and 7.6% a year earlier. This upward trajectory indicates that borrowers are facing escalating financial pressures due to high inflation rates and interest rates that have increased to around 7.5% for auto loans.

The average loan-to-value (LTV) ratio for subprime loans remains elevated at 115%, indicating that many borrowers are financing amounts that exceed the actual value of their vehicles. This is concerning, as it suggests a potential overextension of credit in the subprime segment.

Furthermore, the volume of subprime loans has been on a slight decline, with new originations decreasing by 3% year-over-year, reflecting tightening lending standards in response to rising risk.

Despite these challenges, the overall performance of auto loan asset-backed securities (ABS) remains relatively stable. The average credit enhancement ratio has improved slightly to 39%, indicating that investors are still willing to engage with the market, albeit with caution.