Subprime borrowers are “suffering serious financial stress,” signaling rising strain in economy

The economy is showing signs of strain, particularly among subprime borrowers who are typically more vulnerable to financial stress, suggesting the economy may be facing a bigger delinquency risk than previously feared.

Data from Equifax and Moody’s Analytics shows that borrowers with a VantageScore below 660 have seen a sharp increase in missed payments this year.

The subprime loan delinquency rate jumped to 8.3% in September, marking its highest level for that month since 2010, in the aftermath of the global financial crisis.

The problem, according to Moody’s chief economist Mark Zandi, isn’t just the elevated level of delinquencies. It’s the direction they’re heading.

“Subprime borrowers are indeed suffering serious financial stress,” Zandi wrote. “It is just more evidence of how hard-pressed lower and middle-income Americans are.”

After years of improvement, subprime delinquencies have reversed course. Rates had been steadily declining from their post-crisis highs through the late 2010s, but the trend has worsened since the pandemic as high inflation, record debt burdens, and tighter affordability have squeezed household budgets.

The concern is amplified by the fact that subprime borrowers typically have limited financial buffers, making them the first to feel stress when living costs rise or the economy slows. As a result, their delinquency rates often serve as an early warning signal of broader weakness across the U.S. economy.

Consumer confidence falters as spending divide widens

Rising delinquencies come against a backdrop of mounting economic anxiety. The University of Michigan’s consumer sentiment survey in October showed that Americans’ view of current economic conditions had fallen to its lowest level in three years.

The survey found that households remain deeply concerned about inflation, while fears of job losses are growing. Those worries may be justified: economists note that the number of job seekers has now outpaced job openings for the first time since 2021, signaling a cooling labor market.

Americans’ outlook on the future has also deteriorated sharply, with Michigan’s Index of Consumer Expectations crashing 32.1% compared to October 2024.

American companies are also sounding alarms about a widening spending gap between affluent consumers and everyone else.

“Businesses are increasingly feeling the fallout on their sales and profits from the mounting skew between the haves and the have-nots,” Zandi told Reuters.

Adding to the caution, new data from the National Retail Federation shows that nearly two-thirds of shoppers plan to wait for holiday discounts before making purchases, up from 59% last year, highlighting how consumers are tightening their belts even as the holiday season approaches.