Report: Subprime Buyers Not Paying Auto Loans

As the resulting complications of coronavirus lockdowns obliterate the economy, reports have emerged that subprime car buyers are beginning to skip payments. Delinquencies were expected to come up a bit this year, even before local governments started issuing lockdown orders, but the swift economic impact of these health initiatives have proven wider-reaching than anyone anticipated.

Normally, the status of the more volatile subprime market is a useful tool in assessing the financial well-being of the country as a whole — sort of an early warning device for economists. However, getting an accurate read on who stopped paying could be hard during the pandemic. Many lenders are offering deferral programs to keep one or two delinquent payments from turning into full-blown defaults. Still, the initial signs are about what you’d expect, and it plants another economic red flag into American soil.

Credit Acceptance, a U.S. auto lender focused on customers subprime credit scores, issued a warning on Tuesday. Referencing a recent filing with the Securities and Exchange Commission (SEC), the company said, “the current outbreak of COVID-19 has adversely impacted our business, and the continuance of this pandemic and any future outbreak of any other highly contagious diseases or other public-health emergency could materially and adversely affect our business, financial condition, liquidity and results of operations.”

It then suggested many other subprime auto finance providers should buckle up, because it doesn’t anticipate this being an isolated incident. It’s also postponing its first-quarter financial statement until the end of June while also pushing back a planned shareholders meeting. However, while Credit Acceptance felt comfortable in delaying what’s likely to be a rather unpleasant financial report, it did manage to get out a warning that subprime buyers are getting behind on their payments in its regulatory filing with the SEC.

Bloomberg shared a portion of that document on Tuesday, noting that the lender had witnessed a “sharp drop-off in payments” as people impacted by COVID-19 prioritize other things:

As unemployment soars, borrowers are putting off payments or “reallocating resources,” Credit Acceptance said in a regulatory filing Monday, explaining that it needs more time to publish a quarterly report. New lending is also slowing as dealerships across the U.S. are forced to shutter their showrooms, the company said.

“A continued disruption in our workforce, decrease in collections from our consumers or decline in consumer loan assignments could cause a material adverse effect on our financial position, liquidity and results of operations,” Credit Acceptance wrote.

The firm is among the first to report an uptick in delinquencies as some lenders offer forbearance, hoping that what consumers need is time to get through the pandemic so they can resume payments. Ally Financial Inc. said on Monday that about 25 percent of its auto-loan customers have taken advantage of its payment-deferral program.

That’s substantial, but questions remain. While unemployment has taken off like a rocket, it’s unknown how many of those lost positions will re-emerge on the other side of the pandemic. Likewise, loan forgiveness programs are supposed to help customers weather the inclement economic situation so they can return to making payments later. That, in addition to how long the public puts up with various states’ lockdown orders and how nasty the pandemic ultimately becomes, will probably be the deciding factor in how this plays out. This is also preliminary data, though we have an inkling subsequent reports will be similar over the next few months.

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