Auto borrowers missing car payments is latest sign of consumer stress
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One of the nation's biggest auto lenders says its customers are falling behind on car payments — the latest evidence of consumer stress in the economy.
Why it matters: National data shows rising auto delinquencies, a trend that indicates the extent of financial constraint facing consumers that typically prioritize car payments.
- Now a new warning from a top lender shows the challenges facing borrowers might be getting worse as economic conditions weaken.
What they're saying: "We're clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that's worse," Ally Financial CFO Russell Hutchinson said this week.
- Hutchinson, who spoke at a high-profile conference hosted by Barclays, said that delinquencies spiked above the company's expectations over the summer.
- Ally sees growing instances of late-stage delinquencies—those at least 60 days past due. Net charge-offs, or debts unlikely to be recovered, were higher than expected.
- "Our sense is that's probably going to expand in coming months just given the size of this population of struggling borrowers," Hutchinson added.
What to watch: Ally said employment conditions have worsened quicker than they expected, with little clarity about when they anticipate delinquency pressures to ease.
- "Ally told you, 'here's where we're at right now, and we're watching the data come through.' That leaves the opportunity for things to get worse as an assumption," Sanjay Sakhrani, a bank analyst at KBW, tells Axios.
- "This period of time is unprecedented, and it's been very hard to model."
By the numbers: Roughly 8% of auto loan balances were at least 30 days past due in the second quarter of this year, the New York Fed said last month — a higher share than pre-pandemic times.
- That has moved from the recent low of 5% in 2021, when consumers were flush from pandemic-era stimulus.
- Borrowers faced a double whammy in recent years: elevated prices for new and used vehicles and higher financing costs to buy them.
- About 4% of auto loans had monthly payments of $1,000 or greater as of the second quarter of this year — up from 1% in the same period in 2020, according to Experian.
The bottom line: Inflation has subsided, including for cars. Interest rates will likely fall. But in many ways, auto borrowers will still feel these conditions as the macro economic backdrop deteriorates.
- A New York Fed survey of consumers out this week showed that the perceived chance of missing a debt payment in the next three months hit the highest level since April 2020.
