Top-line metrics like the debt service ratio suggest consumer finances are stable. However, microdata reveals a "K-shaped" divergence where many households are struggling. This paradox highlights the increasing inadequacy of using macroeconomic averages to assess the true health of the American consumer.

Recent stress in credit card and auto loan markets is concentrated in loans originated in 2021-2023 when stimulus and looser standards prevailed. Lenders have since tightened, and newer loan portfolios are performing better, suggesting the problem is not spreading systemically.

Over 15 years, auto loans transformed from the best-performing loan product to the riskiest. This shift is driven by a "double whammy" of soaring vehicle prices—which outpaced even mortgage growth—and rising interest rates, compounded by overlooked costs like insurance and repairs.

Tom cites ATTOM data: lenders repossessed 5,794 homes in August, up 42% year over year, while overall foreclosure filings rose only 13%. That gap means distressed homeowners are reaching the end of the process faster. He adds there are more houses for sale than buyers and auto-loan defaults are rising.

Rising delinquencies in subprime auto are not a sign of a uniformly weak consumer. The underperformance is largely confined to loans originated from 2022-2024, which were impacted by a unique combination of inflated used car prices and sharply higher interest rates, leading to strategic defaults.

Despite a rise in auto loan delinquencies, default rates have remained low. This is because high used vehicle values ensure that the collateral securing the loan retains significant worth. Lenders face lower potential losses on repossessions, making the asset class attractive despite shakier payment performance.

The dramatic rise in BNPL usage across all demographics, including 41% of young shoppers, is a negative forward-looking indicator. While framed as innovation, it's a form of modern usury that reveals consumers cannot afford their purchases, creating a significant, under-discussed credit risk for the economy.

An alternative data point from Equifax reveals significant economic stress. The delinquency rate for subprime auto loans (borrowers with scores below 660) has reached 10%, a level higher than that observed during the 2008-2009 global financial crisis, signaling trouble for lower-income households.

In a highly concerning paradox, delinquency rates for subprime auto loans are now higher than they were during the 2008 financial crisis when unemployment was 10%. This signals extreme stress among lower-income consumers even in a strong labor market.