Smart Borrower Blog

Deep-Subprime Auto Loan Delinquency Rates Hit Pre-Recession Levels


Sep 6th, 2017 @ 3:21 PM by Amber Nelson


Auto-loan borrowers with the worst credit are falling behind on their payments at a rate not seen in a decade, according to data from credit reporting agency Equifax.

Deep-subprime borrowers, as they are called in the industry, have been defaulting on their auto loans at alarming rates. “Performance of recent deep subprime vintages is awful,” an Equifax slide show on second-quarter credit trends reported.

“We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,” said Amy Crews Cutts, Equifax chief economist, in an email. “In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”

Cutts suggested that the jump in deep subprime delinquencies is related to a loosening of underwriting standards, not an increase in the number of borrowers with poor credit. “It isn’t a case of chasing a larger subprime share,” Cutts said. There’s been “almost no change in median credit scores. That means [lenders that specialize in subprime loans] are letting other underwriting characteristics slide.”

Some of those sliding standards include auto loans with terms of up to 7 years. Such long terms are risky because the vehicle’s value will likely fall below the loan value before the end of the 7 years. The borrower would be unable to sell it and still pay off their loan.

The overall car loan market looks better, however. The general auto loan delinquency rate (loans that are more than 60 days past due) is at just 0.91 percent, up 0.08 percent from the previous year. For those borrowers with prime credit the late payment rate was only 0.33 percent, a 0.03 percent yearly increase.

“Risk in auto lending is actually very balanced,” Cutts said, but she warned that the subprime auto loan delinquency rates are concerning. “As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,” Cutts said.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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