The rising cost of living and a softening labor market are making it increasingly difficult for lower-income borrowers to keep up with their payments, causing a surge in credit card and auto loan delinquencies. This trend has sparked concerns among Wall Street executives and led to a dip in consumer-lending stocks last week.
At a recent Barclays conference in New York, banking executives highlighted the escalating delinquency rates. The average interest rate on a credit card climbed to 21.51% in May, up from approximately 15% in 2019, according to Federal Reserve data. Over the past year, 9.1% of credit card balances have turned delinquent, marking the highest rate in over a decade, as reported by the Federal Reserve Bank of New York in August.
This trend extends to auto loans as well. Ally Financial Inc., a major auto lender, reported that late payments and charge-offs on auto loans exceeded expectations in July and August. This is particularly worrisome as car payments are typically the last bills to go delinquent due to the necessity of transportation. The average interest rate on a new car loan has also risen significantly, reaching 8.2% in May, up from 5.3% in 2019. About 8% of auto loans have become delinquent over the past year, the highest rate in over a decade, according to the New York Fed.
The mounting delinquencies are causing anxieties in the financial sector. Bread Financial, a credit card company that caters to lower-income borrowers, anticipates higher charge-off rates this year. These charge-offs represent balances that banks write off due to non-payment.
The impact of these rising delinquencies is evident in the stock market. Consumer-lending companies experienced downward trends last week. However, on Tuesday, the market saw a rebound with stocks like Enova International Inc., Qifu Techhnology, Inc., Regional Management Corp., Bank of America Corporation, Ally Financial, and Capital One Financial Corporation showing gains. This suggests that investors are optimistic about the long-term prospects of these companies despite the current challenges.
As the economic landscape continues to evolve, it remains to be seen how these rising delinquencies will impact the consumer-lending industry and the broader financial market.
