US Subprime Auto Loan Delinquencies Surge, Signaling Deepening K-Shaped Slowdown

In the United States, a surge in auto loan delinquencies is making signs of an economic slowdown clearer. In particular, as arrears among low-credit borrowers have soared to levels higher than during the COVID-19 pandemic or the financial crisis, some analysts say the polarization of a “K-shaped economy” is deepening beneath the surface of the recovery.

On the 21st (local time), CNN, citing data from credit rating agency Fitch Ratings, reported that among subprime borrowers with credit scores below 670, the share of auto loans that are 60 days or more in arrears was tallied at 6.43%. That is double the level since 2021 and more severe than during the COVID-19 pandemic, the Great Depression, and the dot-com bubble collapse. The number of auto repossessions is at the record high since the 2008–2009 financial crisis.

Auto loans are considered the last repayment item U.S. households give up, because vehicles are essential for commuting and making a living. But soaring vehicle prices, high interest rates, and inflation are converging, pushing households’ repayment burdens to the limit.

According to market researcher Cox Automotive, the share of subprime borrowers whose vehicles have been repossessed or are slated for repossession neared 10% as of September. Many borrowers owe more than the value of their cars, making it hard to pay off the liability even if they sell the vehicle. Many are already in arrears on other debt such as mortgage loan, credit cards, and student loans. Jonathan Smoke, chief economist at Cox Automotive, warned of financial instability among subprime borrowers, saying there is “no room for error.”

The costs of buying and maintaining a vehicle have also jumped. According to market researcher Experian, more than 75% of new-car loans in the second quarter have monthly payments of $500 or more, and 17% exceed $1,000. As of August, auto repair costs surged 15% from a year earlier, and insurance premiums also rose 5%. As student loan repayments, which were paused during the pandemic, resumed, credit scores fell faster, which in turn led to higher auto lending rates.

While delinquency rates among vulnerable groups are surging, high-credit borrowers are still keeping up with payments. Rod Tshadehambhe, chief strategist at Bloomberg Intelligence, said, “There are no warning bells for prime borrowers.” The arrears rate among prime borrowers remains low at under 0.5%.

Experts analyze this phenomenon as a classic example of the polarization of the U.S. economy. High-income groups with assets are benefiting from a stock market boom and rising real estate assets, while low-income groups are struggling with soaring prices and debt repayments. This suggests that the “K-shaped economy” structure, in which the gap between classes has widened since COVID-19, is becoming entrenched.

Pamela Foohey, a car finance expert and a professor at the University of Georgia School of Law, said, “Subprime lenders are installing GPS on vehicles to track their location in the event of arrears, and are even resorting to remotely disabling ignitions.”

George Baddin, head of Detroit vehicle repossession firm Midwest Recovery & Adjustment, said, “The number of repossessions is already approaching Great Depression levels,” warning that “the subprime market is under severe stress.”

Experts noted that if a rise in unemployment or a recession becomes evident, auto loan defaults could emerge as a new vulnerability for U.S. households. Professor Foohey said, “The current spike in delinquency rates is not just an economic cycle but a sign of economic fissures caused by income disparity and structural inflation.”