Auto loan defaults drift up

Auto loan default rates rose slightly in August according to data released in the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, in contrast to small increases in numerous other default rates.

The composite rate was 0.96% in August, up four basis points from the previous month. The auto loan default rate also increased four basis points to 0.90%, compared to 0.86% in July. However, the default rate was lower than the same month a year ago, when it stood at 1%.

“The ongoing improvement in the consumer economy is reflected in consumer credit default rates,” says David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. “In recent months, we have seen substantial job growth, increases in consumer spending, and a rise in consumer credit outstanding. Despite continued weak wage growth, consumer credit default rates remain in a narrow range at low pre-financial crisis levels.”

“Two economic areas showing strength are auto sales and housing. Car and light truck sales saw recent gains reaching an annual rate of about 17.5 million units as sales of new homes and housing starts picked up. To reflect that the growth in credit is largely due to loosening of credit standards indicating banks are willing to bear increased risk by approving more sub-prime consumers – which will lead the higher default rates.”

Blitzer pointed out that analysts are widely expecting an interest rate hike over the coming month, although this is now likely to happen in the first half of 2016 rather than later this year.

“A quarter-point increase in the Fed funds rate will not affect fixed rate mortgage loans or auto financing. Some small increases in interest rates on bank cards and similar lending may occur in the months following Fed action. Barring a pattern of rapid sustained interest rate increases from the Fed – which no one foresees – the near-term impact on consumer defaults will be very small. Immediate results of a Fed move will be seen in the stock and financial markets.”