More Subprime Borrowers Are Missing Loan Payments

Consumers with low credit scores are falling behind in payments on auto loans, personal loans and credit cards, a sign that the healthiest consumer lending environment is being created. US records are coming to an end.

The percentage of subprime credit cards and personal loans that are at least 60 days late are growing faster than usual, according to credit reporting firm Equifax. Inc.

In March, those crimes increased monthly for the eighth time in a row, nearly reaching pre-pandemic levels.

Many lenders and analysts say an increase in delinquencies is inevitable after they decline during the pandemic. Even so, the gains are getting attention from investors in part because the Federal Reserve, facing its highest inflation since the early 1980s, is embarking on what is believed to be a string of gains. Strongest interest rates in years. Higher delinquency figures could indicate strain on a segment of consumers, whose spending is an important driver of economic activity.

Fears that rising rates will push the economy into recession fueled stocks’ worst start to the year in decades. A poor earnings season for major US retail chains heightened those concerns this week, sending major retail stocks plummeting and sending the Dow Jones Industrial Average to its biggest drop of the year. on Wednesday.

Subprime car rental and leasing debt hit an all-time high in February, based on Equifax’s tracking since 2007.

Many people, including those with less than perfect credit, have paid off their debt and amassed savings during the pandemic, a surprising result given that lenders initially thought the borrowers were vulnerable. Borrowers will default on a series of loans when Covid-19 strikes. Government responses, including stimulus payments and child tax credits, have boosted the financial health of many families.

But now many of those benefits have dried up. Subprime borrowers, sometimes earning less or saving less, are being hit hard. Inflation, which is near a four-decade high, is also forcing many households to choose between paying for essentials and paying off their monthly loans.

Some lenders are also more concerned about the ability of consumers to keep up with payments as some of their financial gains, including excess savings they have accumulated in the early stages. of the pandemic, gradually decreasing.

Wells Fargo & Co.’s CEO Charlie Scharf on Tuesday said higher food and gasoline prices will constrain US households. “We’re still in the best credit environment we’ve ever seen in our lives,” Scharf said at The Wall Street Journal’s Future of Everything Day. However, he added, “There will be a decline in people’s ability to pay.”

An increase in subprime loans may reduce lenders’ willingness to lend to riskier borrowers.

Last year, many lenders took on subprime customers, comforted by low unemployment and fueled by an eagerness to rebuild loan balances that were soon hit by the pandemic. . Subprime lending hit a record last year as measured by the total dollar amount of individual loans sourced and spending limits on new general-purpose credit cards, according to Equifax.


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According to the latest data from Equifax, about 11% of general-purpose credit cards held by consumers with credit scores below 620 were at least 60 days behind in March payments compared to 9. .8% a year earlier. Past due personal loans and lines of credit were 11.3%, up from 10.4% a year ago. Both categories hit Covid-19 era lows of 7.5% and 8.3% respectively in July.

Tracked by Equifax, auto loans and rentals hit record levels in February, based on Equifax tracking, with 8.8% of subprime accounts being at least 60 days behind in payments. The figure dropped to 8.5% in March but remains the second-highest on record.

Fewer people are in the subprime credit score bracket than when the pandemic began. About 18.6% of U.S. adults with credit scores have a score lower than 600 in 2020, compared with 15.5% last year, according to Fair Isaac. Corp.

creator of the FICO score.

Americans have massively increased the amount of credit they’ve used this year. With prices expected to continue to rise, this could be a warning sign about the economy. The WSJ’s Dion Rabouin examines these trends and explains what they tell us. Photo compilation: Elizabeth Smelov

Lenders say delinquencies are growing from artificially low levels and that their credit portfolios overall remain strong. Many refer to what is happening as a normalization, where the crime rate is back to levels more in line with pre-pandemic times. Some say their delinquency remained below the level in the first quarter of 2020.

Capital One Financial Corp.

recorded a 30-day or more overdue rate on U.S. credit cards in the first quarter than it did a year ago. Lender Bread Financial Holdings Inc.

also reported higher delinquency rates for cards and other loans during the quarter. Both lenders issue credit cards to subprime borrowers. Michael Taiano, senior director at Fitch Ratings’ US banking group, said other major card lenders have not recorded this increase in a period of more than a year.

“It would be unnatural for credit to stay where it is,” Capital One CEO Richard Fairbank said on the bank’s last earnings call. “We expect this to be a kind of broad-based return to normal over time.”

Upstart Holdings Inc.,

Oportun Financial Corp.

and OneMain Holdings Inc.,

which facilitates or extends personal loans to people with limited credit histories or low credit scores, also reported increased indebtedness in the first quarter.

Upstart said on its earnings call last week that government stimulus led to a “temporary overactivity” of consumers. It recently reintroduced loan modifications for borrowers who are having a hard time keeping up with payments.

In an interview, Raul Vazquez, chief executive officer of Oportun, said consumers are facing a mix of rising gas and rent prices, while job and wage growth remains strong. strong. “How all of that comes together, we’ll see over the next few months.”

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