Why Subprime Loan Borrowers Are Missing Car Payments

Summary

Podcast Summary:

WSJ Your Money Briefing – Why Subprime Loan Borrowers Are Missing Car Payments
Date: April 6, 2021
Host: J.R. Whalen (The Wall Street Journal)
Guest: Anamaria Andriotis (Consumer Credit Reporter)

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Episode Overview

This episode explores the growing issue of subprime auto loan borrowers falling behind on car payments during the pandemic. While federal relief measures have aided mortgage and student loan holders, similar assistance hasn’t widely reached car loan borrowers—particularly those with low credit scores. The conversation, led by WSJ's J.R. Whalen with reporter Anamaria Andriotis, examines the reasons behind rising delinquencies, the uneven impact of relief programs, and what this may indicate about the broader economic recovery.

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Key Discussion Points and Insights

Who Are Subprime Borrowers?

• Definition: Subprime auto loan borrowers typically have credit scores between 300 and 600. (02:14)
• Divergence in Performance: While borrowers with higher credit scores are faring well (minimal missed payments), subprime borrowers’ delinquency rates have increased over several months. (02:14–02:56)

Relief Programs — Who Gets Help?

• Federal Relief Disparity: Unlike federally backed mortgages and student loans, auto loans were excluded from required relief by federal law. Lenders had discretion over whether to grant any assistance for car loans. (03:05–04:25)
  • Quote:

    "This federal law did not have such a requirement for auto loans and other types of consumer credit. What that meant was it was entirely up to the lenders themselves to decide whether to offer deferment or other types of relief..."
    — Anamaria Andriotis (03:44)

Lenders' Approach to Assistance

• Inconsistent Lender Relief: Relief periods varied (often 1–3 months), but not all lenders offered deferment or significant assistance. Some only waived immediate repossession or charged late fees. (04:37–05:54)
• Protection from Credit Damage: When provided, deferments often protected borrowers from negative credit reporting and kept vehicles from being repossessed temporarily. But there was no guarantee of uniform support.

Why Approve Risky Loans?

• Growth in Subprime Lending: Since the last financial crisis, auto loans have been one of the riskiest areas of mainstream lending. (06:04)
• Extended Loan Terms: Longer payback windows (six or seven years) became more common, resulting in higher risk of delinquencies since cars typically lose value over time.
• Underwater Loans: Many borrowers owed more than their cars were worth from the start, amplifying financial vulnerability. (06:33)
  • Quote:

    "...you had this underwater scenario playing out for many people from the point that loan was being originated. Also something that puts a loan at a higher risk for delinquency."
    — Anamaria Andriotis (07:12)

The Uneven Economic Recovery

• Disproportionate Hardship: While high-credit borrowers show stability ("barely budged" delinquency rates), subprime borrowers face worsening prospects. (07:26)
• Employment as a Key Factor: Subprime borrowers are often struggling due to job loss or reduced income post-pandemic, making it hard to repay loans originated during stronger financial times.
• Spending Stimulus Payments: Government stimulus payments were a temporary lifeline, but often went to essentials like rent and utilities rather than car payments. (08:18)
  • Quote:

    "When the stimulus payments come in, they kind of go out right away. Well, sure, you know, I got the stimulus payment and when I got that I used it to pay the rent I owed... and then I sent what I could to my auto lender."
    — Anamaria Andriotis (08:22)

Outlook and Red Flags for the Future

• Potential Spillover: Millions remain in forbearance for mortgages and student loans. Once those programs end, there is concern that rises in car loan delinquencies may foreshadow similar trends in other consumer debts.
• Big Open Question: Will the expiration of forbearance programs lead to more widespread delinquencies across different types of loans? (09:18)
  • Quote:

    "What we're seeing with auto loans at this point overlaps with the time period during which forbearance, deferment, other hardship relief programs have been ending. So that's sort of the big question: could we essentially see a situation where delinquencies rise when these assistance programs come to an end for other consumer debts?"
    — Anamaria Andriotis (09:32)

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Notable Quotes & Memorable Moments

• Anamaria Andriotis on Relief Gaps:

  "The relief has really been the lender's decision about how much to offer to whom, whom to offer it, and for how long to offer it." (04:42)

• On Underwater Loans:

  "...you had this underwater scenario playing out for many people from the point that loan was being originated." (07:12)

• On Economic Recovery:

  "The share of borrowers with mid range to near perfect credit scores who have missed their payments... remains close to zero percent. It's barely budged..." (07:33)

• On Use of Stimulus Payments:

  "...when the stimulus payments come in, they kind of go out right away..." (08:18)

• On Future Delinquencies:

  "That's sort of the big question that could we essentially see a situation where delinquencies rise when these assistance programs come to an end for other consumer debts?" (09:40)

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Timestamps for Important Segments

• [02:14] – Definition of subprime auto borrowers and their increasing delinquency rates
• [03:05] – Difference in relief offered to auto borrowers vs. mortgage/student loan holders
• [04:37] – How lenders provided varying degrees of auto loan relief
• [06:04] – Expansion of risky subprime auto lending post-financial crisis
• [07:26] – Contrast in delinquency rates: subprime vs. prime borrowers
• [08:18] – Employment status, use of stimulus payments by subprime borrowers
• [09:18] – Concerns about broader economic recovery and potential surge in delinquencies when forbearance ends

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Summary

This tightly focused episode details how and why subprime auto loan borrowers have struggled more than other groups during the pandemic. Unlike with mortgages and student loans, these borrowers received spotty relief, mostly at the discretion of private lenders. Risky lending practices and a lack of financial cushions have heightened delinquency risks for those already financially vulnerable. The rising rate of missed car payments is an early warning for potential future problems in other credit markets as pandemic-era relief expires, exposing the ongoing, uneven nature of the economic recovery.

Transcript

[A]

Deal replaces fragmented payroll vendors with one Global system. No third parties, hire, manage and pay teams in 150 countries. Operate like a local everywhere. Visit deel.com WSJ.

[B]

Here's your money briefing for Tuesday, April 6th. I'm J.R. whalen for the Wall Street Journal. Coronavirus relief measures like mortgage and student loan deferment have freed up cash for millions of Americans. But there's been no such relief for car payments, and that's hurt some people more than others.

[C]

So you have people with good credit who are doing very well with their auto loans. There really aren't any red flags there. But yet the story with people who have credit scores that are 600 and below is so different. I mean, the difference is stark and it raises the questions of, well, why is the performance so different? What is going on here?

[B]

Anamaria Andriotis covers consumer credit for us. Coming up, she'll explain what's contributing to subprime borrowers struggles and what the outlook is like going forward. That's after the break.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[B]

Before the pandemic, Americans who were deemed to be risky borrowers were able to secure subprime auto loans. Now, a year into the pandemic, personal finance struggles are making many of them missed their monthly payments. So is there any relief available and what happens next? Our reporter, Anna Maria Andreotis has been following this issue and she joins me now to discuss. Ana Maria, thanks for being here.

[C]

Great to be speaking with you.

[B]

So, Ana Maria, can you just first define who we're talking about here? Which particular segment of car loan borrowers are falling behind on their payments?

[C]

So what we're looking at here are borrowers who have low credit scores, generally between 300 to 600. This is on a scale that taps out at 850 credit reporting firms. And many lenders define people as being subprime when they have credit scores that are in this range. And what we're seeing is that these borrowers are performing very differently with their loans than people with higher credit scores, specifically that a greater share of people with low credit scores are falling behind and that that share is increasing and has been increasing now for several months now.

[B]

The government has tried to help people stay afloat through things like stimulus payments and loan forbearance and eviction moratoriums. So why is this segment of auto loan holders in trouble?

[C]

There has been a big difference between the relief offered to people who have mortgages and student loans than those who have auto loans, credit cards, and personal loans. And it's important to point this out because it really kind of is the foundation in part for what's going on right now with subprime auto loan borrowers. So a federal law that went into effect last year at the beginning of the pandemic essentially requires that people who have federally backed mortgages or federal student loans that they can get relief in the form of forbearance or deferment, and that they could get that relief for a long time. Many of these people are still in some type of forbearance program that does not require payments. However, this federal law did not have such a requirement for auto loans and other types of consumer credit. What that meant was it was entirely up to the lenders themselves to decide whether to offer deferment or other types of relief to struggling customers and for how long to offer that help for and who would get it. There could be lenders that were offering help but were not offering it to other all their borrowers.

[B]

I have to imagine that lenders don't want to have to go out and repossess cars from people who've defaulted on their loan. So even without a federal requirement to do so, are they doing anything to throw these people out of lifeline?

[C]

So borrowers in general, including subprime borrowers, over the past year have gotten a variety of relief when it comes to their car loans. So again, this relief has really been the lender's decision about how much to offer to whom, whom to offer it, and for how long to offer it. In most cases, the relief has essentially allowed people to not make their payments for one, two, or three months and not risk having their car repossessed and also not have a situation where the lender was reporting them late to the credit reporting firms, which would then result in their credit scores falling. So that relief score certainly is significant with regards to protecting people's credit and their ability to hold on to their cars. But that was not, it cannot be said that that was offered by all lenders. Some, some lenders just did not offer deferment at all and instead offered other types of assistance that in some cases just came down to, okay, well, you're late, we'll charge you a late fee. We might report your Late to the credit reporting firm, but we're not going to repossess your car. So the degree of assistance has varied.

[B]

But Anna Maria, didn't lenders have an idea of what they were getting into here? You know, approving loans for people who may have a tough time keeping up their payments that can get kind of risky?

[C]

That's correct. So really, since the last financial downturn, the riskiest mainstream lending that has been playing out has been in the auto space. Subprime auto loan originations over the past decade certainly grew. It became easier essentially during the past decade for people who had low incomes, didn't have good credit to get loans. There were other terms associated with auto loans that also created a, let's say riskier environment for them. For example, more lenders were increasing the repayment periods on loans. So what maybe used to be a five year loan, you started seeing more of six year or even seven year loans. When you extend the period on an asset whose value generally depreciates over time, like a car, that can get risky, can increase the chances of delinquencies. There were more people whose loans were a larger size, they were greater than the value of the cars that they were buying. And, and, and you had this underwater scenario playing out for many people from the point that loan was being originated. Also something that puts a loan at a higher risk for delinquency.

[B]

And so Anna Maria, what does all of this tell us about the strength of the economic recovery?

[C]

This is an example of the unevenness of the economic recovery at a time when subprime auto borrowers, delinquency rates are rising. The share of borrowers with mid range to near perfect credit scores who have missed their payments on their cars remains close to zero percent. It's barely budged. So you have people with good credit who are doing very well with their auto loans. There really aren't any red flags there. But yet the story with people who have credit scores that are 600 and below is so different. I mean the difference is stark and it raises the questions of, well, why is the performance so different? What is going on here? One of the reasons that for the difference in the way these two groups are performing comes down to employment status. A lot of the people right now who are having a difficult time paying their auto debts lost their jobs, are either still unemployed or have gone back to work, but are not making the kind of money they were before the pandemic. So how do you make a payment on a loan that you got when your income was higher or when you were employed now when you don't have a job or you're making less than you previously were. So I asked people about their stimulus payments. I said, you know, have you received unemployment benefits? Have you received stimulus payments? And one of the things that I thought was really interesting was that for many of these people, when the stimulus payments come in, they kind of go out right away. Well, sure, you know, I got the stimulus payment and when I got that I used it to pay the rent I owed that I was behind on. I used to to pay my utility bills and then I sent what I could to my auto lender.

[B]

And looking ahead, do the struggles we're seeing in this group raise any red flags about how durable the recovery will be?

[C]

There are millions of people who are currently in forbearance on their mortgages and student loans when those relief periods come to an end. This all does raise the question of will we be seeing an increase in delinquencies in mortgages and in student loans? Because what we're seeing with auto loans at this point overlaps with the time period during which forbearance, deferment, other hardship relief programs have been ending. So that's sort of the big question that could we essentially see a situation where delinquencies rise when these assistance programs come to an end for other consumer debts?

[B]

All right, that's Wall Street Journal reporter Anamaria Andreotis. Anamaria, thanks for coming on the show.

[C]

Thanks so much.

[B]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[A]

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