Risky Borrowers Are Falling Behind on Car Payments
More subprime borrowers are missing monthly payments on their cars and trucks, pointing to an uneven economic recovery
A greater share of people with low credit scores has been falling behind on their car payments in recent months, a sign of stress among consumers whose finances have been hit hard by the pandemic.
Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to credit-reporting firm TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019.
More than 9% of subprime auto borrowers were more than 60 days past due in the fourth quarter, the highest quarterly figure in data going back to 2005.
The missed payments are increasing in what has otherwise been a period of relatively low consumer delinquencies, with stimulus payments, unemployment benefits and other measures keeping many borrowers afloat. The rising subprime delinquencies point to an uneven economic recovery and a deep divergence between those who can navigate the coronavirus downturn and those who can’t.
“We are seeing the separation between the consumers who are back on their feet and those who aren’t,” said Satyan Merchant, head of the auto-finance business at TransUnion.
Car loans are a key indicator of how riskier borrowers are faring. The loans represent the biggest monthly debt payment for many subprime borrowers, who often don’t have mortgages or college debt. Many work in restaurants, hotels and bars that have been hurt badly by Covid-19.
Coronavirus relief measures sometimes didn’t reach these people, or helped in only a limited way. The government mandated that borrowers be allowed to pause their monthly payments on federal student loans and federally backed mortgages for a year or more. That means that federal debt relief has been of greater benefit to homeowners and college graduates, many of whom entered the pandemic with savings and kept their jobs.
But the government’s reach doesn’t extend to auto loans, credit-card lending or personal loans, and banks and other lenders have wide discretion over whether to defer payments for their borrowers. Many lenders granted customers one to three months of relief before requiring them to start paying again. Some customers started the pandemic in relatively good financial shape but have fallen into what is considered subprime, which many lenders define as those with credit scores of 600 or less on a scale of 300 to 850.
Joseph Doyle, 41 years old, said he was laid off from his job as a tool and die setter in March 2020 and then fell behind on his $479 monthly auto payments to subprime lender Credit Acceptance Corp. Mr. Doyle, who lives in Detroit, said he asked if he could temporarily pause his payments but the company said it wasn’t offering that option.
Mr. Doyle fell behind on payments starting in May. His last payment to Credit Acceptance was in August. He is working again, he said, as an assembly-line operator at a car manufacturer, but he is making less than he did before.
Credit Acceptance reported Mr. Doyle as late on his loan, and he said his credit score fell by more than 100 points to about 500 in early March, making it all but impossible for him to get an affordable loan. He is considering filing for bankruptcy.
“In response to the pandemic, we offered a robust set of protections to customers who informed us that they were financially impacted by Covid-19,” a Credit Acceptance spokeswoman said.
Though subprime loans tend to carry high interest rates, they are the only option for many car buyers.
When the coronavirus hit, lenders toughened up their approval standards, making it harder for riskier borrowers to get credit. Subprime financing accounted for about 19% of the number of auto loans and leases originated in 2020, down from roughly 22% a year prior, according to Experian PLC.
That decline has contributed to the increasing proportion of subprime delinquencies. With fewer subprime loans being made, the delinquent borrowers make up a bigger share of the subprime pool.
Lenders’ overall portfolios have held up better than expected during the pandemic, thanks in part to their more well-off borrowers. The share of borrowers with midrange to near-perfect credit scores who have missed auto-loan or lease payments remains close to 0%, according to TransUnion. Subprime delinquencies could improve in the next few months with tax refunds and the new round of stimulus payments and if the unemployment rate continues to fall.
Tracy Van Buren of Gardena, Calif., lost her job as a bartender last spring and secured a three-month deferral from JPMorgan Chase & Co. on her car payment, a $286 monthly bill for her Nissan Altima.
Since then, she has relied on income from a temporary job with the U.S. Census and occasional unemployment benefits. She fell behind on payments late last year and has been late by a few days with payments this year.
Ms. Van Buren said she made her March payment with help from her daughter, though she was a few days behind. She was recently hired to be a Covid-19 contact tracer for a public school district and hopes this will help improve her finances.
“It’s been very stressful,“ Ms. Van Buren said. ”I still get up and try to force myself to be hopeful.”
She’s grateful, though, that she still has the car.
Nick Goodwin was in the process of starting trucking school when the pandemic hit and didn’t qualify for unemployment benefits. But with his girlfriend out of work, he called his auto lender to ask for help. The lender, Westlake Services LLC, said he didn’t qualify for relief because he wasn’t behind on his payments.
Mr. Goodwin started missing the monthly payment, a roughly $560 bill on a Dodge Ram, in May. “Things started getting difficult,” he said. “Neither of us [were] working; I’m doing side work to try to scrape by to take care of our kids.”
Westlake gave him several extensions that prevented the truck from getting repossessed. But when those ended, Mr. Goodwin still couldn’t pay his monthly bill, and the truck was repoed in October. Mr. Goodwin said a family friend gave him about $900 to get it back. Afterward, he received more monthly extensions because he couldn’t pay the bill.
A Westlake official said the company “endeavors to keep all lines of communication open for our customers and provide as much help as feasible to those suffering immediate hardships.”
Mr. Goodwin said he and his girlfriend recently found work and are making payments. But they can’t use the truck because it was damaged during the repossession and needs a new transmission, he said.
