Delinquency Rates Poised to Rise After Interest Rate Hikes

Over the past year, the Federal Reserve has increased key interest rates by a half-percent. Much of this is due to the world economy being in improved territory, both on Main Street and Wall Street. Economist are speculating that further rate hikes may be in the offing.

Should they indeed venture higher, delinquency rates are expected to follow suit, according to a recent trend data released by credit agency TransUnion.

"Approximately 1.5 percent of auto loans are expected to be delinquent in late 2017."

21 percent jump expected
Serious delinquency rates – defined as borrowers who are behind on their payments by two months or more – have held in low territory for several years now, averaging 1.2 percent during the fourth quarter of 2013 among auto loans and 1.1 percent a year earlier during the same three-month interval. The rate has since climbed, though, reaching 1.3 percent in the fourth quarter of 2016 and projected to hit 1.4 percent come October through December 2017. If this prediction holds true, it would be a 21 percent increase over the previous five years.

Nidhi Verma, senior director of research and consulting at TransUnion's financial services unit, said that this is something that lenders need to be mindful of as they work with borrowers, several of whom may be less creditworthy than the ideal.

"The consumer credit markets have been functioning extremely well the last few years, but an increase in subprime lending has begun to impact delinquency levels for some industries, specifically the auto finance and credit card markets," Verma explained.

Subprime borrowers more common
Indeed, among credit card borrowers, the serious delinquency rate rose to 1.7 percent in the final three-month period of 2016 – up from 1.5 percent on a year-over-year basis – and is forecast to hit 1.8 percent by the end of this year, TransUnion's projections indicate. That's an increase of 3.5 percent over the last five years. Verma referenced how subprime credit card borrowers are now currently at the highest ebb since 2010, shortly after the Great Recession.

"One-third of millennial women aren't sure how much credit card debt they have."

Borrowers' capability to manage debt is a key component of loan approval. Headed into the New Year, several polls indicated that among consumers' primary resolutions was to get out from under debt, no matter which kind they had. However, a sizeable percentage of millennials – who range between 18 and 35 years old – aren't sure how much debt they actually owe, a separate poll done late last year found. Approximately one-third – 34 percent – of millennial women aren't aware of what they have yet to pay in credit card debt, according to a survey done by polling firm Toluna. Of these, over 6 in 10 worry about what debt they have every now and then, as opposed to all the time.

Though there's no knowing for certain that delinquency rates will intensify, it's important to note that their projected level is still much lower from where they used to be. During the fourth quarter of 2009 – during the height of the recession – credit card delinquencies were in the 3 percent range. It's expected to hit 1.8 percent in 2017's closing quarter, according to TransUnion.

"A moderate increase in card delinquency is natural as more subprime consumers have entered the market," noted Paul Siegfried, TransUnion senior vice president and head of the credit agency's credit card division. "Most importantly, we remain at relatively low levels of delinquency compared to the recession years."

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