US Household Debt Reaches New High

Household debt in the US has surged to a new high according data from the New York Fed.

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Household debt surged by $610 billion to $13 trillion in the third quarter of this year, a 5 percent year-over-year increase. But this is not the only alarming news. While our debt record is reaching levels not seen since the last housing crisis, the most struggling borrowers are also finding it hard to pay back their debts.

Is it going to be 2008 all over again?

Experts say the rise in debt records is a normal phenomenon since the economy primarily runs on the cycle of borrowing and spending.

However, there’s another element in the data that might be too hard to ignore. The rate of delinquencies has increased significantly in the past few years. It even gets harder to not put into question when the industry segment most affected is the subprime market.

Subprime delinquencies prevalent among auto loans

Let’s try to put things into perspective. The whole auto loan market is worth $1.2 trillion. From these, $282 billion were issued to subprime borrowers or those who have credit scores below the usual 620 minimum requirement. Majority of delinquent borrowers are also concentrated within this subprime segment. A loan is considered delinquent if the borrower fails to pay their dues for 90 days or more.

Finance companies originated 74 percent of the $282 billion while the remaining 26 percent were issued by banks and credit unions. Delinquency among subprime auto loans which were originated by banks remained steady since the recession. During the height of the crisis, delinquencies were at 7.1 percent while 2017’s Q3 record is significantly lower at 4.4 percent so there’s less worry among banks.

Comparably, non bank lenders’ delinquency rates have doubled compared to traditional banks. Collectively, there are $435 billion of outstanding auto loans that were made to nonprime borrowers, specifically those with credit scores below 660. An estimated 23 million consumers with credit scores 620 and below have subprime auto loans. Twenty percent of new car loan originations are made to subprime borrowers.

How will it impact the market, given that delinquency rates on this segment of the industry seem to be going out of bounds?

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Non-significant

Given its relative size to the loan market, however, experts say delinquencies from non-bank lenders cannot in themselves impact the economy significantly.

The rise in auto loan delinquencies arose even with laws set in place requiring lenders to ensure that their borrowers understand the kind of situation that they will be in when they take the loan. This is an interesting finding that may require further studies on consumer choices and the rationale behind them.

Other findings from the Fed report include:

• The highest component of household debts is still a mortgage debt taking $8.7 trillion of the total household debt.
• Only 1.4 percent of mortgages are delinquent
• 11.2 percent of outstanding student loans are delinquent. The student loan market is worth $1.4 trillion
• The collective of credit card debts in the country is currently at $24 billion with 4.6 percent considered delinquent
• Auto loan balances increased from $24 billion to $1.2 trillion with delinquencies increasing to 4 percent

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