Subprime, which means “bad credit” and not “low income,” is always in trouble. But it’s only 14% of auto loans. Prime is in pristine condition.

By Wolf Richter for WOLF STREET.

Total balances of auto loans and leases for new and used vehicles inched up by 0.7%, or by $11 billion, in Q4 from Q3, and by 3.0% or by $48 billion, to $1.66 trillion, according to data from the New York Fed, which is based on Equifax credit report data. This relatively modest increase occurred even as the population, employment, and incomes grew, causing disposable household income to grow by 1.3% in Q4, and by 5.1% year-over-year, far faster than auto loans and leases, and so the auto-loan-to-income ratio dipped further.

Of all loans and leases outstanding, only 14.0% were subprime rated, according to Experian data. Of the newly originated loans, 16% were subprime rated, which is historically low, and down from 22.8% in 2019.

One of the reasons the growth of auto loans was relatively modest in 2024, despite rising new and used vehicle unit sales, was that more people paid cash for their vehicles, given the higher interest rates.

For new vehicles, the share of cash purchases rose to 20% in recent quarters, from 18% in Q1 2022. It’s in new vehicles that subsidized leases and rate-buydowns entice buyers to finance though they might otherwise pay cash for the vehicle. For used vehicles, the share of cash purchases rose to 65%, from 59% in Q1 2022, per Experian data.

The burden of auto loans and leases: Debt-to-income ratio.

The burden of these auto loans and leases on households – accounting for more people, higher employment, and higher incomes – can be tracked with the auto-loan-to-disposable-income ratio.

Debt-to-income ratios are a classic measure of the borrowers’ creditworthiness, their ability to deal with the burden of debt.

We use disposable income (by the Bureau of Economic Analysis) because it represents an after-payroll-tax cashflow from all income sources but excludes capital gains: Household income from after-tax wages, plus income from interest, dividends, rentals, farm income, small business income, transfer payments from the government, etc. This is the cash consumers have available every month to spend on housing, food, debt payments, etc.

• In Q4 from Q3: auto-loan balances +0.7%, disposable income +1.3%.
• Year-over-year: auto-loan balances +3.0%, disposable income +5.1%.

As disposable income grew faster than balances of auto loans and leases, the burden of the auto debt on households, in terms of the debt-to-income ratio, dipped to 7.53%, and has been in the same relatively low range all year.

Our Drunken Sailors, as we have come to call them lovingly and facetiously, have switched to just an occasional drink?

Serious delinquency rates: total, subprime, and prime.

The 60-plus day delinquency rate for all auto loans and leases inched up to 1.58% in December 2024, not seasonally adjusted, up just a hair from December 2023, per Equifax data. The highs in 2024 had been in January (1.59%) and February (1.61%). During the Free-Money era of the pandemic, delinquency rates had dropped below 1% (red in the chart below).

Subprime is always in trouble. Fitch, which rates asset-backed securities (ABS) backed by auto loans, splits out the delinquency rates for prime-rated auto loans (blue in the chart below) and subprime-rated auto loans (gold in the chart).

Subprime means “bad credit” at the time of origination – a history of delinquencies and unpaid bills – and not “low income.” Low-income people have trouble borrowing, and if they can get credit at all, the amounts are small. It’s people with high-enough incomes that get seriously into it over their head, often as part of a learning experience early on in their careers.

Fitch’s subprime 60-day-plus delinquency rate ticked up to 6.15% in December 2024, up from 5.94% in December 2023. These delinquency rates peak in January or February. They hit an all-time high of 6.4% in February 2024 and may end up in the same neighborhood in February 2024.

Only 16% of all auto loans originated in Q4 were subprime, most of them to finance the purchases of used vehicles, particularly older used vehicles, sold by specialized subprime dealer-lender chains, or financed by specialized subprime lenders. Lenders package these loans into ABS and sell these bonds to pension funds and other institutional investors that buy them for their higher yield. Only 14% of all outstanding loans and leases were subprime. It’s a small specialized high-risk-high-profit part of auto lending.

Prime-rated auto loans are in pristine condition, with delinquency rates hovering at 0.37% over the past few months, including December. Even during the Great Recession, the prime delinquency rate rose to only 0.9% in the worst months (blue):

In case you missed the earlier parts of the debts of our Drunken Sailors:

Here Come the HELOCs: Mortgages, Housing-Debt-to-Income-Ratio, Serious Delinquencies & Foreclosures in Q4 2024

Household Debts, Debt-to-Income Ratio, Serious Delinquencies, Collections, Foreclosures, Bankruptcies: Our Drunken Sailors’ Debts in Q4 2024

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