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.