According to a report published by UBS, nearly 17% of all US consumers are liable to default on a loan payment in the next twelve months. In addition, the Federal Reserve's January report stated that over a third of large banks expect the quality of their auto loans and credit card loans to depreciate in 2017. Nearly a quarter of US bank are predicting a rise in consumer loan delinquencies in 2017, which will be the highest in a decade.
According to the UBS Evidence Lab, middle and upper income, urban, and young males in the coastal region are most likely to default on loans. Defaults on auto loans are also likely to lead to nonprime defaults on personal loans and credit loans. Around $179 billion worth of auto loans are subprime out of a total value of approximately $1.07 trillion. Across loans, subprime debt is a staggering $1.25 trillion. This includes auto loans, mortgages, and student loans. A subprime loan is defined as a loan provided to a borrower with a credit score lower than 600.
According to UBS, over half the group profiled have income that barely covers or is lower than their expenses. A sixth of the group reported income that significantly covered expenses, and this group is where the risk lies. They are estimated to represent nearly a third of all outstanding consumer debt.
High-quality borrowers also liable to default
There is a great deal of evidence that displays that near-prime and prime borrowers are also expected to default in greater numbers in 2017. If high-quality borrowers are expected to default, the numbers for subprime borrowers are far more likely to be worse. In addition, prime borrowers are more likely to default as banks have been increasingly picky in terms of lending to those high-quality borrowers.
Why are default rates likely to increase?
Any increase in default rates can directly be tired to loosening of lending conditions and massive consumer inequalities in the United States. Non-bank lenders in particular are responsible for the easy lending conditions. The central bank's reflation efforts have failed to stimulate inclusive economic growth and have benefited a certain segment of the population. Credit demand from high-quality borrowers is predicted to have peaked and this increases the pressure on younger people, who are more likely to be subprime borrowers.