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Subprime car loan, lease defaults hit all-time high in February

Subprime car loan, lease defaults hit all-time high in February

Used cars on display at K&L Auto Expert on May 06, 2022 in Richmond, California.

Used cars on display at K&L Auto Expert on May 06, 2022 in Richmond, California.
PhotoPhoto by Justin SullivanGetty Images

The good times of easy credit seem to be coming to an end as subprime borrowers are increasingly in arrears. That scary trend is happening with debt ranging from credit cars to car loans. In February, auto loan defaults stood at 8.8 percent, a 15-year record, according to Equifax.

The Wall Street Journal reports that many people have increased their savings and paid off debt during the pandemic, thanks in part to incentive payments and child tax credits (proving once again that, with just a little breathing room, most lower-income people are acting responsibly and paying their bills and saving ). But that short-term trend, combined with banks’ desire to get the economy going again, led to easy credit.

That breathing space is long gone. Despite strong employment and rising wages, consumers are affected by high gas pricescar prices, housing costs and general inflation across the board. And that worries banks – not about people’s well-being, but of course about their ability to get paid. from WSJ

There is also broader concern among some lenders about consumers’ overall ability to track payments when some of their financial benefits, including excess savings they built up during the early stages of the pandemic, wane.

Wells Fargo & Co. Chief Executive Charlie Scharf said Tuesday that higher food and gasoline prices will constrain American households. “We’re still in the best credit environment we’ve ever seen in our lives,” said Mr. Scharf at The Wall Street Journal’s Future of Everything festival. But, he added, “There will be a deterioration in people’s ability to pay.”

Subprime loans hit record levels last year, supported by pent-up consumer demand and high employment. As always happens with subprime loans, what goes up inevitably has to come down. Lenders are not really concerned. There are still fewer Americans with “subprime” credit scores today compared to when the pandemic began: 18.6 percent before 2020, up from 15.5 percent today. Bank officials told WSJ that current default rates are a market correction from artificially low levels.

Subprime loans are too often predatory and put desperately poor people in an impossible position. However, it is a business that will not disappear anytime soon, as subprime lenders make money whether borrowers pay or default