US sub-prime car loans start to raise new concerns

More borrowers in the US with spotty credit are failing to make their monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt.

Delinquencies on sub-prime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010, according to data from Wells Fargo.

Rising delinquencies are a warning sign that more loans may end up in default, said John McElravey, an analyst at the bank.

What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the month before.

That is also the highest since 2010, the data show.

Securities backed by auto loans are structured to absorb a portion of anticipated defaults, but concerns have mounted over the last year that cumulative losses on car loan securitisations may end up exceeding initial estimates.

Loan performance may be worsening due to a number of factors, including a rise in jobless claims, said Mr McElravey.

Mr McElravey identified one car finance company in Texas that began experiencing an increase.

The increase coincides with a rise in unemployment in Texas, where the oil industry has been hit.

The data is worth watching, he added, “especially against the backdrop of sub-par economic growth”.