Many consumers throughout the U.S. are starting to default on their auto loans, according to Bloomberg. In the past year, more people went into default as they struggle with rising interest rates on credit cards and other revolving accounts. Some analysts speculate that the increase in defaults on auto loans is a direct result of lenders loosening their credit standards. Recent reports by Capital One and Discover show that consumers are showing signs of weakness in their ability to pay off their credit card debt. Both companies reported a significant rise in their charge-off rates, with Capital One reporting its largest increase in six years.
Capital One’s credit lending model focuses on sub-prime borrowers, which are borrowers with less the prime credit scores. The model puts the company squarely in the face of massive loan losses since sub-prime borrowers are the likeliest category of borrowers to miss monthly payments on a regular basis. Discover also reported a drop in the reliability of its credit-card debt. Discover’s net charge-off rates rose to levels not seen since 2014. Many analysts fear the growing default ratios point to a new risk in consumer credit. Although mortgage debt has declined in recent years, consumer debt now stands at a staggering 20 percent of the country’s yearly economic output. Student loans and auto loans represent the biggest portion of the annual economic output.