Smart Borrower Blog

Auto Loan Industry Continues to Boom but Not Without Risks


Jul 20th, 2016 @ 8:10 PM by Amber Nelson


The U.S. auto lending industry has been busy this year. Car loans and leases grew to a total value of $1 trillion a few months ago, with large lenders like JP Morgan Chase and Wells Fargo seeing almost double-digit growth in volume since 2015.

And yet this stellar rise carries a lot of risk of loss. In order to keep up the volume of loans, lenders have lowered their credit standards with the average credit score of buyers falling slightly to 710 this year. Among subprime borrowers – those with blemished credit histories – the average credit score fell to 575 in 2015, down from 581 the year before, according to a report from credit-ratings firm DBRS Inc.

That same report predicts that losses from securitized subprime auto loans are going to rise, forecasting that 18 percent of all subprime loans securitized in 2015 will go unpaid, up dramatically from the 14.4 percent in losses from 2014 and 12.8 percent in 2012.

Part of that loss risk comes from an increase in the size and value of subprime loans. Loans securitized in 2105 from poor-credit borrowers jumped to an average of 115 percent of the car value, up from 112 percent in 2014. With loan-to-value ratios so high, it makes it more difficult for lenders to recoup any losses in the case of repossession.

And with average loan size and monthly payments growing for all borrowers, the risk to the lending industry and investors continues to grow. According to credit agency Experian, the average loan size for new cars has reached an all-time high, topping $30,000, while the average monthly payment for borrowers is also at a record high of about $500.

Even lenders are seeing the signs of trouble. As JPMorgan Chief Executive Jaime Dimon warned at a New York conference in June, “someone will get hurt in auto lending.”

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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