Subprime Auto Loans Increase But Quality Slips
Jun 19th, 2013 @ 12:09 PM by Amber Nelson
The number of subprime auto loans, including those made to borrowers with the very worst credit, are trending upward, but the quality of those loans is being called into question.
Subprime loans – made to borrowers with credit scores of 680 or lower – accounted for 35.4 percent of all auto loans in the first quarter of 2013, up from 34.9 percent a year ago, according to credit-reporting bureau Experian.
Deep subprime car loans, those made to car buyers with a credit score of 550 or below, made up 11 percent of all auto loans during the first quarter, up from 10.7 percent one year earlier, marking the first yearly increase in 4 years. The last time deep subprime auto loans made a year-over-year jump was in the first quarter of 2009 when they reached a peak market share of 15.7 percent.
At the same time, delinquencies have been increasing on all subprime loans as well. “Obviously, we never want to see a rise in delinquencies or repossessions, but when you compare the current findings with previous years, they are still lower than the recession-level rates,” said Experian’s senior director of automotive credit Melinda Zabritski in a statement. “As we continue to move forward, we should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate. However, one thing most lenders will agree upon is that today’s subprime borrower is less delinquent than those in the past.”
Even if the rise in delinquencies was somewhat expected, lower quality auto loans could still spell trouble for the economy. Moody’s Investors Service warned consumers this week that subprime car loans have been going to borrowers with lower and lower credit scores and delinquencies have been on the rise.
“The increased competition among subprime lenders is resulting in more loans to borrowers of weaker credit quality,” said Peter McNally, a Moody’s Vice President in a press release. “The credit weakening has been gradual so far, so losses won’t spike immediately. But more borrowers are going to default eventually, as originations continue to grow.”
And if there are any sudden jolts to the market, they could “drive losses up more quickly to levels that will stress lenders’ servicing ability and may eventually threaten their solvency.”
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.