Car loans are going bad at an alarming rate, especially for younger borrowers, according to report released by the Federal Reserve Bank of New York.
However, the researchers found credit unions have lower delinquency rates and a smaller share of subprime borrowers than other types of lenders.
Their report, posted on the New York Fed’s blog on Tuesday, said credit reports in 2018 reflected $584 billion in new auto loans and leases, up 2.6 percent from 2017. The volume of originations last year was the greatest in the 19 years tracked by the New York Fed’s Consumer Credit Panel.
The researchers found that although delinquency rates are below the peaks hit in 2010, about 7 million borrowers were seriously delinquent (90 days or more late in payments) at the end of 2018, about 1 million more peopled than at the end of 2010.
“The surging auto loan industry has been on our radar for more than five years now,” the researchers wrote. “The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector.”
The researchers found a sharp worsening in the flow of loans into serious delinquency among borrowers age 30, while the rate had worsened slowly for older borrowers.
As the economy has grown, the percentage of households with car loans has grown. At the same time, the percentage of loans that are seriously delinquent has risen to levels not seen since 2012.
The report issued on the New York Fed’s blog credits an increase in subprime lending for much of the increase in loan penetration.
“With growth in auto loan participation, there are now more subprime auto loan borrowers than ever, and thus a larger group of borrowers at high risk of delinquency,” the report said.
The researchers found overall auto loan performance deteriorating, despite a higher share of prime loans. In the fourth quarter, 2.4 percent of loans tipped into the seriously delinquent category, up from the low of 1.5 percent in 2012.
Subprime loans were based on borrowers who had credit scores less than 620 as of 2018′s third quarter. Credit unions held $340 billion in auto loans as of Sept. 30, 14 percent of them subprime.
The analysis found banks had a balanced 38 percent market share of both the nation’s $1.2 trillion car loan portfolio as of Sept. 30, and the nation’s $285 billion in subprime auto loans.
While credit unions held a 27 percent share of U.S. auto loans, they held only 17 percent of the nation’s $285 billion in subprime auto loans. By contrast, auto finance lenders had only 12 percent of the total auto loan market, but 26 percent of the subprime portfolio.
“The performance of loans reflects these quality differences,” the researchers said. Among loans originated by auto finance lenders, 6.5 percent of them were 90-plus days past due, compared with only 0.7 percent of loans originated by credit unions.