By on November 13, 2013

finance

Subprime borrowers have accounted for more than 27% of new car and light truck loans this year, the highest level since 2007, according to Bloomberg. A year ago, a buyer with a credit ranking in the bottom percentile would not likely have been able to buy a car. This year people with credit stores as low as 500 or lower have qualified for loans.

After the Federal Reserve has kept interest rates near zero for five years now, the subprime car loan market is now being described as “frothy”. With interest rates so low, investors are willing to purchase the riskier bonds that back subprime car loans in pursuit of higher returns. A number of financial companies have entered that market. Citigroup reports that 13 loan backers have accessed the asset-backed market to fund subprime auto loans this year. 

Experian Automotive says that subprime car loans are at their highest level since they started tracking loan data in 200y, over 27 percent. That’s up two percent from last year and 9 percent from 2009, when lenders became more conservative with their loans during the recession.

In dollar figures, so far this year issuance of bonds backing subprime auto loans are up to $17.2 billion, more than twice the amount of debt backing subprime car loans during the same period in 2010, though it’s down from the 2005 high of $20 billion.

Subprime car loans are seen as less risky than backing real estate mortgages because cars’ value can be more accurately assessed and they are easier to repossess than a house. Also, people who need to get to work prioritize their car payments.

Fifty-eight percent of loans taken out to buy Dodge brand vehicles in October were above the industry average of 4.2 percent annual percentage rate, according to Edmunds. The average loan to buy a Dodge came with an APR of 7.4% and nearly a quarter of Dodge loans were charging more than 10% interest. Dodge is the brand with the highest percentage of loans exceeding 10% interest, followed by Chrysler and Mitsubishi.

Though subprime auto loans have increased, late payments on them have been contained. Delinquencies in August were at 3.1% of the debt, compared to 13.3% in 2009. The Federal Reserve Bank of New York, in an Aug. 14 report, said it didn’t see evidence that a “disproportionate or unusual” volume of new loans are being made to high risk borrowers.

Industry observers say that U.S. auto sales, having their best year since 2007, are increasingly being fueled by borrowers with imperfect credit. “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, an analyst for Morgan Stanley, wrote last month.

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26 Comments on “Subprime Car Loans At Highest Level Since Before Recession...”


  • avatar
    gmichaelj

    200y? what year did you mean?

    great graphic btw, where did you get it?

  • avatar
    raph

    Hmmmm…. I read this as rich people need poor people.

  • avatar
    Onus

    I hear ads like this everyday on the radio. Whoever is paying 10%+ interest on a car is an idiot.

    It’s not like you can’t build up a credit in a less costly way you just may have to wait a year to get your car.

    The stupid low interest rates only create fake asset bubbles.

    • 0 avatar

      One of my clients financed his 1st car at a 22% for $680 a month payments. Her credit improved and she bought a newer car at a 7% for payments around $525 a month.
      Now she has a new Lexus with a 3% at $680 a month.

      People aren’t taught about credit in High School and they WILL make bad decisions with it especially when taking out student loans.

      Couple that with the fact people will pay more to drive a used car they really can’t afford – instead of buying a fully loaded car they could easily afford.

      The uses car market here in NYC is a crime scene. MAJOR WORLD hands out their fair share of N.I.N.J.A loans. Their “business office” looks lke a prison cafeteria. Illegal aliens and low incomers of the bottom 48% trying to buy that used BMW 5-series with 60,000 miles on it!

      …or, they’ll offer you a new Malibu from their Chevy division fully loaded.

      But NOOOO – you can’t take the Malibu because if you don’t have the BMW, no one will think you’ve “made it”.

      • 0 avatar
        Flybrian

        What this guy said. ^^

        I see and do it everyday. 24-29% APR, usually short-term, usually under $10k financed, usually around $250-300/mo for a 4-8 year-old car.

        It happens, but people have to get around. And the Jalopnikesque advice of EMRUGEHRDBUYA $2000 CAR ON CRAGISLIST OR A MIATA! doesn’t work when you need a sport utility or van or truck for work.

        • 0 avatar
          Onus

          Plenty of good cars to get on Craigslist for 2k. Like a Toyota Camry. Dime a dozen around here, reliable, and cheap to fix ( do they break? ).

          It may be automotive enthusiast sacrilege but if you got to get to work its a solid choice.

          Plenty of truck for a couple grand too ( if you stay away from diesels ), and the older ones are easier to fix.

          • 0 avatar
            APaGttH

            That is regionally dependent. In Puget Sound, I wouldn’t trust a $2K Craig’s List car as my daily transportation.

            in Puget Sound if it runs, the heater/defroster still works, has a shred of life in the tires and brakes, doesn’t need an oil change, and it can pass emissions, its worth $3K. It could have a dead body in the trunk, cancer, smell like an ashtray, and a dent in the miscolored misaligned passenger door – it’s worth $3K

      • 0 avatar
        Onus

        Yeah its pretty bad here too just up the coast in CT.

        I have a friend who got a 2005 neon. I asked how much in the end it was like 10grand. I told him his car is only worth a couple grand on a good day.

        I’m in the same boat. But, i had no credit. I’ve been going to college but have gone to the local community college and now a state college so the price is low and grants have covered it. I also work in my field part-time so when i finish I’ll be golden.

        So i got a secured credit card, probably could get a unsecured card but didn’t have anybody with good credit to cosign, and i was unemployed at the time. I just use it to pay reoccurring bills (cellphone), sometimes other things. I pay it off in full, and my credit limit was just doubled recently. Don’t know what my score is but i imagine it is better than nothing.

        I figured i should start now. I don’t plan on getting a loan for anything right now but when i do I’ll have a great score.

        • 0 avatar
          Toad

          Onus, glad you can tell us how life works before you graduated from college. Just like every other 22 year old…

          Get back to us in a few years when you have actually had a few full time jobs, a kid or two, maybe a spouse, not necessarily in that order. All of the above can quickly torpedo your best financial and life plans.

  • avatar
    Land Ark

    “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,”

    Is it really a recovery if the numbers are based on the same factors that caused the numbers to become artificially/irresponsibly inflated in the first place?

    • 0 avatar
      danio3834

      We’re headed down the same path in every facet. We’re a debt based economy, even if it means bad debt in many cases.

    • 0 avatar
      RobertRyan

      This sounds like a replay of all the negative factors that were around before the GFC.

      • 0 avatar
        highdesertcat

        Yep, I agree. Then again, it’s been said that the past is prologue.

        The current US administration is trying to cattle-prod the financial industry so that the US economy and , in turn, the global economy, will perk up.

        I’ve been following labor statistics rather closely for the last five years because I have a vested interest in what my grand children are facing at the beginning of their working life.

        If I were a betting man, my money would be on the financial industry in America because the labor participation rate in America is only 63%.

        So what I see happening is that many employers will be downsizing the number of their employees and expansion of their businesses will slow even more than it is now.

        OTOH, I see the Finance Industry booming, deriving their ‘growth’ on the back instruments and ventures that leave the investor holding the bag if they fail.

        But when the Fed pulls back on or slows down QE from $85B a month to whatever, the amount of easy money in the US economy will decrease and bring on a host of new issues for the economy to cope with.

        So maybe these subprime loans to anyone with a pulse ensures a revenue stream, or hedge against slower times in the future, for the lenders, until the borrower loses their income.

  • avatar
    shaker

    Ha ha, White House in background, ha ha. :-(

  • avatar
    doctor olds

    The auto market collapse of ’08 was a direct result of the freeze in consumer credit that is just now getting back to normal. Auto loans were not the cause of the problem, butMortgage backed securities that crashed the financial world. Vehicles can be easily repossessed and resold at minimal loss. It is not the problem some think.

    • 0 avatar
      Kyree S. Williams

      Right. And when statistics say something like the fact that lenders lose an average of $7,000 on a repossessed car or something like that, that figure probably includes projected profits they’d have made if the person had paid the entire loan with interest, and the relatively trivial costs of securing and transporting the vehicles.

      • 0 avatar
        doctor olds

        @Kyree- My point is that car repossessions do not have much impact on the sector let alone the whole economy, as we experienced in ’08, and seems to be alluded here.

        I am interested in where to obtain such statistics. My perspective is from just being in and following the business for many years. Lenders are not in the habit of taking bad bets unless they make so much on them in aggregate that the losses are acceptable. I don’t know the average repo loss, and would like to know how the $7,000 is derived for better understanding.

        My logic was that repo costs are low, vehicles are easily resold, whether the lenders lose or not, and that being underwater in a car doesn’t keep you from choosing between moving to where there is work and losing your home, or staying put, waiting for the local economy to improve. Cars don’t create problems of this magnitude.

      • 0 avatar
        Domestic Hearse

        There are companies that’ve been in the non-prime car lending business for decades and have worked out the analytic tables that cover the cost of repossessions over their entire loan portfolio. Many PhDs in statistics at work modeling the default rate and building that into the program.

        Note, even prime customers default, though not at the same ratio as non-prime customers.

        The experienced non-prime lenders were hardly hurt during the crash of 08. For reasons discussed above in the article, the default rate did not increase with cars as badly as it did with houses.

        Where we get into trouble is when institutions not well-versed in non-prime jump into the market without properly building their business models. Those are the ones that chase profits at the expense of sustainability.

        A significant (and growing) portion of consumers find themselves as non-prime in the wake of the crash of 08, due to job or home loss. This makes jumping into this market even more tempting for inexperienced firms.

        And we find ourselves now experiencing pent-up demand. Many people have put off vehicle purchases due to economic circumstances, and are now coming back into showrooms — getting back into their normal trade cycle.

        So worry not about the repo costs – and the default rate. Both are very consistent and planned for. Worry about the banks jumping into the non-prime market without knowing the game. Those are the ones typically classified as too big to fail, which they do with increasing regularity.

  • avatar
    fredtal

    The problem is people can’t or won’t do the math.

  • avatar
    Flybrian

    Most of the buyers in the deep subprime category are ‘get-me-done’s whose prime consideration is payment, i.e. “If I give you my ’95 Crapwagon and $1000 down, can I leave in your ’07 Chrysler for $300/mo or less? Deal.”

  • avatar
    hreardon

    Credit, like anything, is useful when used correctly and deadly when used wrong.

    The fact that finance is such an integral part of our culture and society and yet we do little to nothing to teach our children about it in school is a crime. Period.

  • avatar
    doctor olds

    Most buyers’ primary consideration is the payment regardless of category! Some lease, others buy. Few pay cash, but even that can be thought of as a monthly payment in the sense of lost investment income potential.

    I’ve done it a lot of different ways. I’ve bought cheap cars, fix-en-uppers, and new cars with the plan to buy low, sell high. Made 5%-8% on some of them! After years with a company car (the BEST way of all) and having one sale attempt turn in to a gun in my face and carjacking(!) I like leasing!

    • 0 avatar
      JFranz

      Doctor Olds pretty much sums up what was my main consideration when we fell on hard times. Not only was it hard to find a car loan, but the payment was out of our budget for most lenders. We did find a sort of specialist that dealt with bad debt type car loans, and what they did was have a number of levels with corresponding interest rates – this is compared to the dealers that we saw that seemed to have one rate which was extremely high for less than perfect credit. Anyway this company, Trend Financial in Toronto had a level that was not the lowest with the highest rate, but one in the middle that we fell into and made the payment acceptable, which is why we went with them. You can find them at http://www.trendcarloan.ca

  • avatar
    dash riprock

    We have experienced a brutal recession. Unemployment went up by a very significant amount. The unemployed are much more likely to have suffered damage to their credit. Now when they go shopping to replace their 12 year old beater, they carry damage credit to the dealership with them.

    It will take time for those whose credit was damaged to repair it. The subprime market will probaly be larger for a while just based upon that alone. It is not a sign of lenders going crazy necessarily.

  • avatar
    APaGttH

    This only tells half the story. Not only easy credit, but ridiculous low lease rates from resale value losers like Dodge and Chevy all the way to BMW, and Lexus that when you do the math, there is no way on earth, or any other parallel universe, that the residual value is going to be covered.

    I don’t know if it was TTAC or LLN that reported on the Corolla, as one example, that Toyota changed the lease math that instead of basing it on 53% of sticker, it is now 63% of sticker – when the current math doesn’t even add up at 53%. You can point out the same thing almost certainly on the BMW 320i, the Mercedes CLA, the Cadillac ATS, and a long list of other cars with give away leases.

    Yes, your credit needs to be better to get these deals – but it is going to hurt the used car market, and someone is going to have to eat those gaps in residual value.

    The finance situation is a feckin’ mess again – we didn’t learn a whole lot. Sure, delinquency is only “3.1%” but we’re an economic downturn away from 13% plus again.

    The most I every paid in interest on a car loan was 13% – and that was in the Reagan years, when 13% was pretty darn good. If I look back I believe since 1998 its been 0%, 0.9%, 0% and 0% – the other three cars in the mix were bought cash leafy greeny money.


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