S&P Global Ratings say there are increasing numbers of people defaulting on car loan payments. With payments falling at their highest rate in six years, there are concerns that some bonds backed by car loan payments could be downgraded.
As competition has increased, many lenders have loosened their standards, meaning that those with weak credit have been able to access car loans. The result is that more people are falling behind. In August, around 4.85 percent of loans provided to subprime borrowers were over sixty days in arrears. This compares to 4.14 percent for the same period in 2015. The levels of defaulting prime borrowers also increased, from 0.41 percent in August 2015 to 0.5 percent for the same month this year.
The data suggests that some investors will increasingly bet against subprime auto loans. Car lenders have no restrictions on whom they can offer money to - rejections in the twelve months up to June 2016 were at 5.2 percent, a decrease from 11.1 percent for the twelve months up to October 2015. Loan recoveries may be further hurt by the longer-term loans being made, and the lower prices of used cars. "The auto industry has also become intensely competitive, which has led to price competition, loosening of credit standards, and higher charge-offs," S&P noted.
Despite the increasing loan defaults, the U.S. economy remains strong, with a rise in employees starting jobs last month. Charles Evans, the president of the Federal Reserve Bank of Chicago, suggested that unemployment rates could drop further.
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