Subprime auto loans could be facing increasing delinquencies

The coronavirus pandemic has changed so many businesses in one way or another. Some businesses have had to close up completely because they're not deemed essential and can't function another way. Some businesses that aren't essential have managed to stay open by utilizing options such as home delivery or pick-up.

Still, there's no denying that the pandemic has had a seriously negative effect on the economy. More people are out of work and business has slowed down quite a bit, leading to a recession. While this has hurt a lot of different aspects of the economy, one aspect you may not have thought about are subprime auto loans.

Subprime auto loans are loans that are given to people who have either poor credit or no credit. These loans are higher risk due to those who have them have poor financial standing. As a result, the chance of repossession is higher than regular car loans. Car dealerships often partake in subprime auto loans as opposed to banks and lenders.

Due to the coronavirus pandemic causing many people to be unemployed, there is no doubt that some of those people already have a subprime auto loan. With their income now gone, they may be looking for help in getting an extension on paying it off. With a recession on the horizon, some experts have concerns as to how subprime auto loans should be affected.

"We said for multiple years that a recession would have an interesting effect on the industry. This will probably fill that bill. We've already heard lots of other companies are slowing down. Lots of companies have had layoffs. A few companies have ceased to originate already. It’ll be very interesting to see the overall effect on the competitors in the industry," explained Consumer Portfolio Services chairman and chief executive officer Charles "Brad" Bradley Jr.

Serious delinquencies in subprime auto loans (which are categorized as being at least 90 days past due) have increased. In the first quarter of 2020, they increased by a concerning 13 percent to hit $68 billion USD. This makes up 5.05 percent of $1.35 trillion USD of all auto loans.

In fairness, delinquencies were taking place for subprime auto loans before the coronavirus pandemic hit. But by April of 2020, many reports were coming out that more delinquencies were taking place as business took a massive hit. This ties back to the high rate of unemployment because many who are unemployed were— according to a Securities and Exchange Commission (SEC) filing— "delaying payments or re-allocating resources, leading to a significant decrease in our realized collections."

According to Ally Financial, their first quarter resulted in $504 million USD in loan losses, which was chalked up to the coronavirus hurting the economy. The company’s CFO, Jennifer LaClair, said that 25 percent of subprime auto lenders requested a deferral of payment, while 18 percent enrolled in deferral projects by March 31st, 2020. Ally does allow their borrowers to defer payments for 120 days without fee. They're not consider delinquent, but this is still alarming.

While the subprime auto loan business has managed to be successful, that appears to have been negatively affected by the pandemic. The bubble of subprime auto loans could very well burst due to the economy suffering. People who have this kind of loan need to proceed with caution in trying to pay it off. As for the rest of us, all we can do is watch and see how this industry is affected as the economy is practically shut down.