Subprime Auto Defaults Hit 30-Year High, Flashing Economic Warning
Delinquencies on loans to risky borrowers have surged to the highest level since 1994, signaling distress for lenders and the used car market.
A critical segment of the $1.56 trillion U.S. auto credit market is flashing its brightest warning sign in three decades, as a growing number of consumers with poor credit fall behind on their car payments.
Delinquencies for subprime auto loans 60 days or more past due have surged to nearly 6.5%, the highest level recorded since Fitch Ratings began tracking the data in 1994. This spike in defaults surpasses levels seen during the 2008 financial crisis and signals deepening financial distress among American households grappling with high vehicle prices and persistent inflation.
The trend poses a significant headwind for the financial institutions that underwrite these loans and the used-vehicle retailers that depend on them. The pressure is already becoming visible on corporate balance sheets. Used car giant CarMax (KMX), for instance, recently reported a surprise $142 million provision for loan losses, a nearly 40% jump from the prior quarter, citing rising consumer strain. Investors have taken note, with CarMax shares trading near their 52-week low of $42.34.
The surge in missed payments is a direct consequence of the economic environment. Many subprime loans originated during a period of inflated used car values and stimulus-supported consumer spending. As savings have dwindled and higher interest rates have taken hold, households are finding it increasingly difficult to manage debts taken on when credit was cheaper and vehicle prices were at their peak.
"We are seeing the tangible effects of eroding consumer health," noted analysts at a recent industry conference. The combination of elevated car prices and financing costs is creating a precarious situation for borrowers, with repossessions also climbing nationwide, approaching levels last seen during the Great Recession.
Specialist lenders are also navigating the turbulent landscape. Ally Financial (ALLY), a major auto lender, has managed to keep its charge-off rates relatively stable, recently guiding its full-year net charge-off forecast to between 2.0% and 2.15%. While the firm's stock has performed better than many peers, its careful management of loss expectations highlights the industry-wide recognition of rising risk. Similarly, Credit Acceptance Corp. (CACC) has acknowledged underperformance in loan vintages issued between 2022 and 2024, reflecting the challenging credit environment.
The deteriorating credit quality in the subprime auto market serves as a potential canary in the coal mine for the broader economy. While the auto finance sector remains stable overall, the stress in the subprime segment underscores the vulnerability of lower-income consumers. As lenders inevitably tighten credit standards in response to rising defaults, it could further dampen demand in the already-slowing used car market, placing additional pressure on retailers and potentially triggering a broader repricing of risk across consumer credit.