Subprime Auto Lending on the Rise

Man dragging broken car
Subprime lending is growing according to two industry reports. Studies by Experian Automotive and the Federal Reserve Bank of New York found that auto loans are being repaid more, despite being given to an increasing number of subprime borrowers.

The Experian report found that nonprime, subprime and deep-subprime loans account for 35.2 percent of all auto loans opened during the recent Q2 2013 financial quarter. This is an increase from the 34.9 percent seen in Q2 2012.

In addition, quarterly repossessions dropped by 14.8 percent and reached the lowest rate since the organization started tracking the data in 2006. The report found that only 0.36 percent of auto loans ended in a repossession, a decrease from 0.43 percent seen in Q2 2012.

The Fed report released today said that delinquency rates improved considerably. The 90-plus day delinquency rate dropped to 5.7 percent, the lowest reported since 2008.

Auto loans are a major focus of the Fed report due to their “v-shaped recovery” seen since the Great Recession.

David Bakke, Money Crashers editor, said this type of recovery occurs when a sales decline is followed by a significant increase.

“It’s obviously a boost for the auto industry at the moment, considering that sales have risen so sharply,” he said.

Although positive, neither report surprises Lisa Goodner, an operations manager for Integrity Auto Finance. She said the path of the economy, with a reduction in unemployment and an increase in consumer confidence, impacted the reports heavily.

After the Great Recession, many consumers lost their positive credit scores after foreclosures, repossessions and increased debts. Although consumers are slowly building up their credit, their scores are still labeled as subprime.

Goodner said because more people returned to the workforce, the demand for new auto loans increased two-fold. Firstly, people need new vehicles to replace the used cars they kept around during financial lows. Secondly, consumer confidence has increased and consumers are willing to take on more debt.

The two-fold changes have also stimulated subprime auto lending. But the spike is likely to decrease in the next few years.

“We will see that [subprime] consumer group recover as well and return to the prime market,” Goodner said.

Experian found that although the total number of outstanding auto loan debt increased from $682 billion in Q2 2012 to $751 billion in Q2 2013, delinquencies and repossessions reduced significantly.

Bakke believes the increase in outstanding debt and other report findings are encouraging. Despite a slow-recovering economy, consumers are committed to repairing their credit scores and fulfilling their financial obligations.

“The long-term success of the economy will be driven by consumers being willing to take on debt, whether through car loans or mortgages,” Bakke said.