U.S. Household Debt Reaches Record $13 Trillion

As the stock market soars to new heights, new data shows that U.S. household debt has reached a record high.

The Federal Resere Bank of New York said Tuesday that household debt totaled $13 trillion in the third quarter ended September 30, an increase of 0.9% from the previous quarter.

This marks the 13th straight quarterly increase (not adjusted for inflation) of household debt.

One area of consumer debt stood out from the pack.

Here’s what you need to know.

U.S. Household Debt: The Highlights

  • Overall: The $13 trillion of household debt is $280 billion above its 2008 third quarter peak, and 16.2% above the 2013 second quarter trough.
  • Mortgage balances: remain the highest component of household debt, comprising $8.7 trillion
  • Mortgage delinquencies continued to improve, with 1.4% of mortgages 90+ days delinquent
  • Student loan debt: $1.4 trillion, with 11.2% 90+ days delinquent
  • Credit card balances: increased by $24 billion, with 4.6% 90+ days delinquent
  • Auto loans balances: increased by $24 billion to $1.2 trillion, continuing a six year trend, while 90+ day delinquencies increased to 4%

Auto Loans: Delinquencies Rising

One area for concern, according to the New York Fed, is rising auto loan delinquencies to sub-prime borrowers. The New York Fed estimates that 23 million consumers hold subprime auto loans, which are based on a credit score below 620.

Approximately 20% of new car loan originations are made to sub-prime borrowers.

These loans were not made by traditional banks or credit unions, but by auto finance companies such as car dealers.

While banks and credit unions typically lend to consumers with higher credit scores, subprime loans are predominantly originated by auto finance companies, which in aggregate have a 70% market share and $200 billion in loans.

The growth in household debt can be attributed, at least in part, to the growth in auto loan balances, which have increased for 26 consecutive quarters as a result of new loan originations.

Notably, there is a divergence in the delinquency rate between bank and credit union lenders compared with non-bank lenders.

Auto loans from traditional bank lenders had a 4.4% 90+ days delinquency rate, and have been improving since the financial crisis.

However, auto loans from non-bank lenders have been more than double those of traditional bank lenders – at about 9.7%.

In aggregate, there are approximately $435 billion of auto loans outstanding that were made to consumers with a credit score below 660.

Given its current relative size as a consumer loan segment, delinquent subprime auto loans from auto finance companies do not, on an absolute basis, meaningfully impact the overall economy.

However, the subprime auto market is important to monitor at least in the near-term as one economic barometer.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you live a better financial life.

Article courtesy of Zach Friedman and Forbes at https://www.forbes.com/sites/zackfriedman/2017/11/14/debt-auto-loans/#3406d9d8ffbf