Why Americans Are Falling Behind on Auto Loans At Their Highest Level Ever
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Odd Lots, hosts Joe Wiesenthal and Tracy Alloway explore the complex state of American consumer health with Ricard Bandebo, Chief Economist at VantageScore. The conversation reveals a nuanced economic picture where aggregate household balance sheets appear healthy due to significant home equity and stock market gains, yet concerning trends emerge beneath the surface. (04:18) Auto loan delinquencies have reached historic highs, surpassing even student loan defaults, while higher-income households that were initially insulated from financial stress began experiencing increased delinquencies in 2023. (22:58) • The episode examines the "K-shaped economy" phenomenon, revealing that wealth rather than income has become the primary differentiator in consumer financial health, with homeownership serving as the most significant buffer against economic pressures.
Speakers
Ricard Bandebo
Ricard Bandebo serves as Executive Vice President, Chief Strategy Officer, and Chief Economist at VantageScore, the largest credit scoring company in the United States. VantageScore was founded nearly twenty years ago by the three major credit bureaus (TransUnion, Equifax, and Experian) to drive competition and innovation in credit scoring while expanding access to credit for millions of Americans. Bandebo leads the company's strategic initiatives and economic analysis, focusing on developing more predictive scoring models that can evaluate 33 million more consumers than traditional methods.
Joe Wiesenthal
Joe Wiesenthal is co-host of the Odd Lots podcast and a Bloomberg Markets Live reporter and editor. He brings extensive financial journalism experience to analyzing complex economic trends and market dynamics, particularly focusing on consumer behavior and macroeconomic indicators.
Tracy Alloway
Tracy Alloway is co-host of the Odd Lots podcast and a Bloomberg Markets Live reporter covering financial markets and economic policy. She specializes in examining the intersection of financial markets and real economic impacts, with particular expertise in credit markets and consumer finance.
Key Takeaways
Credit Scores Are Relative Risk Measures, Not Absolute
A fundamental misunderstanding exists about how credit scores work. (18:33) Credit scores represent relative risk at a specific point in time, not absolute risk measures. A score of 720 in 2017 carries different actual risk than the same score in 2022 due to changing economic conditions. This occurs because credit scoring models can only evaluate individual factors while external economic conditions affecting entire populations cannot be included in personal credit assessments due to Fair Credit Reporting Act regulations. Understanding this helps explain why lending standards must be constantly adjusted even when scores appear stable, and why historical credit score comparisons can be misleading without economic context.
Wealth, Not Income, Drives the K-Shaped Economy
The K-shaped recovery is real, but it's driven by wealth accumulation rather than income levels alone. (22:31) Higher-income households without significant wealth buffers (particularly homeownership) experienced rising delinquency rates in 2023, challenging assumptions about income-based economic resilience. Homeownership emerged as the strongest predictor of financial stability because it provides accessible equity during stress periods. This insight reveals why focusing solely on employment and wage data misses crucial economic vulnerabilities, particularly among professional workers who may have high incomes but limited accumulated wealth.
Auto Loans Have Become the Riskiest Consumer Credit Product
Auto loans have undergone a dramatic transformation from the safest consumer credit product in 2010 to the riskiest by early 2024. (41:47) This shift reflects multiple compounding factors: dramatically increased vehicle prices, higher interest rates, and crucially, rising insurance and maintenance costs that consumers often underestimate when making purchase decisions. Unlike mortgages where default processes are lengthy, auto repossessions happen quickly, making defaults particularly harmful to consumers who depend on vehicles for employment and daily life. This trend signals broader consumer stress since people historically prioritize car payments above almost all other obligations.
Hidden Leverage Through Buy-Now-Pay-Later Creates Blind Spots
The explosion of buy-now-pay-later services and informal lending creates significant visibility gaps in consumer leverage assessment. (44:48) Most BNPL providers don't report to credit bureaus, and informal family loans are completely invisible to traditional credit monitoring. This hidden leverage means traditional credit analysis may significantly underestimate actual consumer debt burdens and default risk. Lenders are increasingly incorporating cash flow analysis and bank account data to capture the full picture of consumer financial health, recognizing that credit bureau data alone no longer provides comprehensive risk assessment.
Student Loan Resumption Created Unprecedented Delinquency Levels
Student loan delinquencies reached over 20% when payments resumed in 2024, more than double historical norms of around 10%. (49:59) This crisis reflects both the five-year payment pause and the complexity of changing forgiveness programs that left borrowers confused about their obligations. Many borrowers had never made payments due to graduating during the forbearance period, creating an entirely new cohort of inexperienced borrowers. While rates have improved slightly to 17-17.5%, they remain at historic highs, and additional cohorts may still face payment resumption as various programs expire, suggesting this crisis may not yet be fully resolved.
Statistics & Facts
- Auto loan delinquencies have reached historic highs, with the product transforming from the safest consumer credit in 2010 to the riskiest by early 2024. (41:47) Ricard Bandebo noted this dramatic shift, explaining that Americans traditionally prioritize auto payments above other obligations since cars are essential for employment.
- VantageScore can evaluate 33 million more consumers than traditional FICO scoring methods by using innovations like time-series data and alternative information such as utility and rent payments. (14:53) This represents a significant expansion of credit access for previously "unscorable" populations.
- Student loan delinquencies exceeded 20% when payments resumed in 2024, more than double the historical norm of approximately 10%. (49:59) This represents the highest level in recent history, with rates subsequently declining to 17-17.5% but remaining well above normal ranges.
