December 4, 2022

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More Subprime Borrowers Are Missing Loan Payments

Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end.

The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to credit-reporting firm

Equifax Inc.

In March, those delinquencies rose month over month for the eighth time in a row, nearing their prepandemic levels.

Rising delinquencies were inevitable following their decline during the pandemic, many lenders and analysts said. Even so, the increase is getting attention from investors partly because the Federal Reserve, facing the highest inflation since the early 1980s, is embarking on what is expected to be the sharpest series of interest-rate rises in years. Higher loan delinquency figures can indicate stress on the part of consumers whose spending is a significant driver of economic activity.

Fears that rising rates will throw the economy into recession have fueled the worst start of the year for stocks in decades. A poor earnings season for major U.S. retail chains has intensified those concerns this week, prompting large declines in major retail shares and sending the Dow Jones Industrial Average to its steepest drop of the year Wednesday.

Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.

Many people, including those with less-than-perfect credit, paid off debts and built up savings during the pandemic, a surprising outcome considering that lenders at first thought borrowers would default en masse when Covid-19 hit. The government’s response, including stimulus payments and child tax credits, boosted many families’ financial health.

But now many of those benefits have run out. Subprime borrowers, who sometimes have lower incomes or less savings, are being hit hard. Inflation, running near its highest point in four decades, is also forcing many households to choose between paying for essentials and paying their monthly loans.

There is also a broader concern among some lenders about the ability of consumers overall to keep up with payments when some of their financial benefits, including excess savings that they accrued during the early stages of the pandemic, taper off.

Wells Fargo

& Co. Chief Executive

Charlie Scharf

said Tuesday that higher prices for food and gasoline will constrain U.S. households. “We are still in the best credit environment we have ever seen in our lives,” Mr. Scharf said at The Wall Street Journal’s Future of Everything Festival. But, he added, “There will be deterioration in people’s ability to pay.”

The jump in subprime delinquencies could reduce lenders’ willingness to make loans to riskier borrowers.

Lenders have kept their standards for mortgage loans relatively strict. A red-hot housing market and a flood of mortgage applications meant lenders could be picky with their offerings and the type of borrowers they approved.

But last year, many lenders embraced subprime customers for other types of loans, comforted by low unemployment and fueled by an eagerness to rebuild loan balances that took a hit early in the pandemic. Subprime lending hit records last year when measured by the total dollar amount of personal loans originated and spending limits on new general-purpose credit cards, according to Equifax.

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Some 11% of general-purpose credit cards held by consumers with credit scores below 620 were at least 60 days behind on payment in March compared with 9.8% a year prior, according to the latest data available from Equifax. Personal loans and lines of credit delinquencies came in at 11.3%, up from 10.4% a year prior. Both categories hit Covid-19-era lows of 7.5% and 8.3%, respectively, in July.

Car loan and lease delinquencies hit a record in February, based on Equifax’s tracking, with 8.8% of subprime accounts behind on payment by at least 60 days. That edged down to 8.5% in March but was still the second highest level on record.

Fewer people are in subprime credit-score brackets than when the pandemic began. Some 18.6% of U.S. adults with credit scores had a score lower than 600 in 2020, compared with 15.5% last year, according to

Fair Isaac Corp.

, creator of FICO scores.

Americans have massively increased the amount of credit they’ve taken on this year. With prices expected to continue rising, this could be flashing a warning sign about the economy. WSJ’s Dion Rabouin examines these trends and explains what they tell us. Photo composite: Elizabeth Smelov

Lenders say that delinquencies are going up from artificially low levels and that their credit portfolios overall remain strong. Many refer to what is happening as a normalization, where delinquency rates return to levels more in line with prepandemic times. Some say their delinquencies remain below their first-quarter 2020 levels.

Capital One Financial Corp.

recorded a higher U.S. credit-card 30-day-or-more delinquency rate in the first quarter from a year prior. Lender

Bread Financial Holdings Inc.

also reported a higher delinquency rate for its cards and other loans for the quarter. Both lenders issue credit cards to subprime borrowers. Other large card lenders didn’t record this increase for the year-over-year period, said

Michael Taiano,

senior director at Fitch Ratings’s U.S. banks group.

“It would be an unnatural thing for credit to stay where it is,” Capital One Chief Executive

Richard Fairbank

said on the bank’s last earnings call. “We would expect this is an across-the-board kind of return toward normal over time.”

Upstart Holdings Inc.,

Oportun Financial Corp.

and

OneMain Holdings Inc.,

which facilitate or extend personal loans to people with limited credit histories or low credit scores, also reported increased delinquencies for the first quarter.

Upstart said on its earnings call last week that government stimulus led to a temporary overperformance of consumers. It recently reintroduced loan modifications for borrowers who are struggling to keep up with payments.

Consumers are dealing with a mixed bag of rising gasoline prices and rent, while employment and wage growth remain strong,

Raul Vazquez,

Oportun’s chief executive, said in an interview. “How that all mixes out we are all going to see in the next few months.”

Write to AnnaMaria Andriotis at [email protected]

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