The auto industry’s “check engine” light has been on for far too long, and now it’s blinking urgently. Unfortunately, for some lower-income drivers, it may be too late to fix, despite repeated warnings from Sheldon.

Odometer reading: In September, the number of American subprime (credit scores below 670) auto borrowers at least 60 days behind on their auto loans hit a record high of 6.11%. Rising delinquency rates show just how much lower-income Americans are struggling, emphasizing the most significant economic pressure since the Great Recession. Higher interest rates and auto prices are mostly to blame:

• Subprime borrowers now pay up to 22% on their new or used auto loan, similar to credit cards.
• Monthly new car payments now average $760 for subprime borrowers, and while used car payments have declined, they’re still coming in at $536.

The number of auto repossessions is also rising. Cox Automotive estimates that 1.5M vehicles will be seized this year, up from 1.2M last year.

How big of a problem is this?

In the third quarter, US light vehicle sales jumped 17% from the previous year — showing little signs of a slowdown in auto sales. And per S&P Global, delinquencies have been “almost entirely in the subprime segment.” When accounting for all loans, the percentage of late payers in Q1 was only 1.69%, which still surpasses the peak of 1.46% during the Great Recession. Comparatively, the impact of subprime loan delinquencies is small but meaningful.

• Nearly a third of US consumers are subprime borrowers (Experian) — who “can often be a first line of where we start to see the negative effects of macroeconomic headwinds,” per Fitch’s Senior Director Margaret Rowe (BBG).
• According to S&P Global, subprime borrowers have represented around 15% of total outstanding loans since the Great Recession — while loans to those under a 660 credit score made up nearly 25% of the $162B loan originations in 2023 Q1.

Forward-looking: Last month, US Auto Sales, which even sold to subprime borrowers through its dozen dealerships, filed for bankruptcy — joining several other subprime-focused dealerships that’ve gone under this year. The pain may not end there, with Moody’s warning that delinquencies will continue “rising materially” in 2024, potentially peaking at 10%.