U.S. Job Market Update

In February, the U.S. economy saw the addition of 151,000 jobs, as reported in the latest jobs report. This increase comes amid a slight uptick in the unemployment rate, which rose to 4.1 percent. Economic analysts, including Paul Mueller from the American Institute for Economic Research, provided insights into these figures during discussions on recent labor market trends.

Surge in Auto Loan Delinquency Rates

American car owners are facing growing challenges, with missed payments on auto loans reaching the highest rate in over 30 years. Recent data from Fitch Ratings highlights that 6.56% of borrowers with subprime auto loans were at least 60 days overdue in January 2024. This marks a significant increase since the commencement of data tracking in 1994.

Subprime Borrowers at Risk

The delinquency trend has been particularly troubling for those with subprime credit scores. Since breaking the 6% threshold for the first time early last year, these figures have remained consistently high, surpassing 6% each month since August 2024, a level not previously reached in the years 1996, 2019, and 2023.

Factors Driving Delinquency Rates

Several intertwined factors contribute to the rising default rates among auto loan borrowers. Consumers continue to grapple with inflationary pressures that have strained household budgets, while increasing interest rates have made new auto loans considerably more expensive. A study by the Federal Reserve Bank of New York noted an ongoing rise in auto loan balances, which surged by $48 billion in 2024 alone, driven by newly originated loans.

Consumer Debt Landscape

Despite the growing turmoil in the auto loan sector, the overall household debt landscape remains stable, with balanced mortgage loans performing well. However, the Federal Reserve’s analysis suggests that “nearly all borrower groups have seen delinquency rates rise beyond their pre-pandemic levels.” For borrowers with credit scores between 620 and 679, the chance of delinquency in a given quarter doubled from 2% before the pandemic to 4% in 2024.

Impact of Rising Car Prices and Interest Rates

The combination of escalating car prices and higher interest rates has notably increased monthly payment burdens. This pressure affects borrowers across various income levels and credit scores. Economists observe that shifts between new and used cars have led to additional stress on lower-income and lower-credit-score borrowers, many of whom have turned to purchasing higher-priced used vehicles in recent years.

Market Trends and Future Outlook

While used car prices have recently begun to decline following previous peaks, many borrowers find themselves in underwater situations, complicating repayment capabilities. The New York Fed reported a notable increase in serious delinquencies, with borrowers 90 days or more past due accounting for 3% in the fourth quarter of 2024, the highest observed since 2010.