NEW YORK — A growing number of Americans are having difficulty paying their monthly car loan payments, an indication that low-income consumers face increasing financial pressure.
The percentage of subprime auto loans that were 60 days or more late reached almost 6.5% in January and remained close to that level, according to Fitch Ratings. The number of vehicle repossessions has increased, more drivers are exchanging cars that are worth less than they should be, and financial institutions such as CarMax and Ally Financial have warned investors about financing performance.
Despite persistent inflation and high tariffs, the US economy appears to be relatively stable. The stock market continues to rise, executives remain optimistic and consumers, in general, are still spending.
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However, weakness in the auto market is one of the clearest signs that low- and middle-income families — the backbone of the economy — may be starting to struggle. Because many Americans rely on their cars to get around, mortgage arrears are an important indicator of financial hardship.
“Is this evidence that some consumers are under stress?” asks Jonathan Smoke, chief economist at Cox Automotive. “I would say yes, definitely.”
Jennifer Alba, 48, decided to buy her first car after being stuck for an hour on the Seattle subway in November 2021. She found a 2018 Subaru Outback, took out a six-year $565 installment loan through Ally Financial, got off the train and went straight to the dealership.
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At the time, Alba was earning around $100,000 a year and had received a small inheritance. She put down $1,500, nicknamed the car “Ruby Subie” and planned to use it for camping.
“I didn’t think I was being irresponsible with my finances,” he said.
In February, he lost his temporary job at an NGO. Since then, he has applied for hundreds of vacancies, without success. His unemployment benefits ran out in August.
With no income and no savings, she stopped paying rent, credit cards, student loans and, finally, her car loan. He still owes $16,000, but is unable to sell the vehicle, which is now worth much less.
“I would prefer to be financially solvent,” he said. “But that’s not my reality.”
Even borrowers with better credit show signs of difficulty. About 2% of all auto loans were significantly late last month, slightly higher than a year ago, according to an analysis from Cox Automotive. Researchers at the New York Federal Reserve also identified an increase in default rates in different regions and credit ranges.
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“Higher car prices, combined with higher interest rates, have increased monthly payments and put pressure on consumers across all income and credit levels,” the researchers wrote. They highlighted that borrowers with lower income and credit face extra pressure, as they may have purchased used cars that appreciated in value during the pandemic and then depreciated in value.
The automotive sector began to show warning signs recently, after the bankruptcy of First Brands, a parts manufacturer, and Tricolor Holdings, a finance company specializing in loans for undocumented immigrants and low-income borrowers. While bankruptcies are linked to fraud and mismanagement, analysis indicates they may signal growing difficulties among the most vulnerable consumers.
“Tricolor gave us a warning sign that something is going to break here,” said Tracy Chen, portfolio manager at Brandywine Global.
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During the pandemic, government stimulus, unemployment benefits and suspension of student loan payments helped increase household savings and improve credit. Wages have grown rapidly in the economic recovery, especially in low-paying jobs, due to fierce competition for workers.
With low interest rates, banks relaxed the criteria for granting credit, facilitating access to financing. To keep installments low, many borrowers opted for longer terms.
But since 2021, prices for goods, including cars, have risen, and higher interest rates have made borrowing more expensive. Savings accumulated during the pandemic were consumed, wage growth for the poorest slowed and the job market lost strength.
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Furthermore, the resumption of student loan payments, suspended during the pandemic, has drained families’ income and increased defaults, affecting credit.
As a result, a growing number of borrowers, especially those with lower incomes, are stuck with financing with high installments and increasingly scarce financial resources.
“People have been able to hold on for a while, but now they’re struggling,” says Mark Zandi, chief economist at Moody’s Analytics.
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Despite the increase in defaults, analysts say that the situation with automotive financing does not threaten the financial system as a whole. In the second quarter, auto loans represented less than 10% of the $18.4 trillion in household debt, according to data from the New York Fed. Subprime financing is just a fraction of this total.
Additionally, newer financings perform better than those originated in 2022 and 2023, possibly because banks have tightened criteria to avoid high-risk loans to borrowers with poor credit.
c.2025 The New York Times Company
