Good News And Bad News On Auto Loans And Delinquent Debt

In today’s Juice, we add another piece to the troubling consumer debt puzzle. But with potential silver linings. Tomorrow, we stick with the auto market and focus on Tesla (TSLA). Because there’s news on the company that might make Tesla drivers, stockholders and enthusiasts happy, if not proud. Proud to be an… 

As we noted last week, Tesla is pretty much always the most searched ticker among retail investors in Trackstar, our proprietary sentiment indicator. Tomorrow’s news puts Tesla in the – count them – four top spots of another index important to investors. Today, we wonder how many Tesla drivers fit into the auto loan categories we’re set to explore. 

Auto Loan Delinquencies On The Rise, But… 

S&P Global Mobility put out a report last week that, among some media outlets, triggered sensational headlines stating flatly that auto loan delinquencies have hit pre-pandemic levels. As our headline reflects, it’s really a bad news-good news situation. To truly make sense of this haves and have nots economy, it’s imperative to explain this distinction. 

Here’s the deal:

• Auto loan delinquency rates of 60 days or more increased across the board from 1.43% in Q1 2022 to 1.69% in Q1 2023. 

This is as bad as it has been since The Great Recession. Plus, we’re now at pre-pandemic levels. 

Here’s the silver lining, depending on who you are:

• Big banks and the financial arms of major automakers have not been impacted, primarily because they tend to only lend to near-prime, prime, prime-plus and super-prime borrowers. 
• It’s lenders who specialize in the sub-prime market, which tends to consist largely of used car buyers, feeling the pain of these delinquent loans. 

Even more good news/bad news: 

• With delinquencies on the rise, lenders are tightening their underwriting standards in an effort to keep the problem from getting out of control. 
• Generally, new car loans are performing better. 
• In terms of delinquency, the most recent new car loans are performing at pre-pandemic lows and better than loans originated prior to the pandemic. 

Taken together, this tells us or, at least, helps us make what we think are relatively safe assumptions: 

• The most financially well-heeled among us are buying new cars and staying current on their loans. Good news. 
• Loans taken out prior to the pandemic and now going delinquent indicate a consumer who got hit hard by the pandemic and subsequent inflationary environment. Not so good news. 

To put a bow around the relatively good news, S&P points out that, in Q1 2019, sub-prime made up roughly 15% of outstanding auto loans. As of Q1 2023 they comprise 14.2%. In a potentially not-so-good, wait-and-see sign, that’s up from 12.9% and 12.3% in Q1 2022 and Q1 2021, respectively. 

The Reason Why We’re Still Worried

People need a place to live, so they tend to make paying their mortgage or rent a priority. Americans tend to need a car to be gainfully employed. So they tend to prioritize making car payments. When people stop making their car payments, this spells trouble. Double trouble for people with bad credit. 

The S&P report also noted that delinquency rates are up for pretty much all types of credit, except for, you guessed it, mortgages. 

• Bankcard delinquencies of 60 days or more reached 1.79% in Q1 2023, up from 1.29% in Q1 2022 and 0.99% in Q1 2021. 
• Unsecured personal loan delinquencies of 60 days or more hit 3.68% in Q1 2023, up from 3.06% in Q1 2022 and 2.58% in Q1 2021. 

The Bottom Line: You can draw a line from people somewhat confidently making pre-pandemic purchases to those same people being flush with pandemic relief cash to those same people running out of pandemic savings to those same people grappling with post-lockdown inflation and running into delinquency issues. That’s our concern. 

If this goes beyond the most financially vulnerable – or even if it doesn’t – it could spell trouble for not only the U.S economy, but the state of our society with the cost of housing and rates of homelessness either outrageously high, on the rise or both.

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