By on May 6, 2015

Buy Here Pay Here Subprime Financing Extravaganza Circa September 2014

Despite the risks subprime auto loans carry, the market is likely to experience only marginal losses through 2015 according to a recent analyst forecast.

Analysts at Fitch Ratings found in Q1 2015 subprime delinquencies of 60 days and above ticked up 3.56 percent, compared to 2.8 percent in 2014, Automotive News reports. Net losses on an annualized basis also went up in the quarter, from 4.96 percent last year, to 6.58 percent now.

Though those increases have given cause for alarm among analysts and the federal government alike, as well as the ever-increasing volume for subprime loans, Fitch claims the loans are performing as they should. However, the rating agency expects the performance to deteriorate over the course of the year, citing factors including easier lending approvals and lower wholesale prices as potential problems.

[Photo credit: Daniel Oines/Flickr/CC BY 2.0]

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16 Comments on “Fitch: Marginal Losses Projected For Subprime Auto Loans In 2015...”

  • avatar

    Given how much interest many of those loans charge, a loss rate of 6.5% (or even a little higher) seems to be well within acceptable limits. They average rates of 10.25%, so there’s plenty of room left.

    The fact that sub-prime loans are behaving in a sub-prime fashion, exactly like they were expected to (and priced for), hardly seems news.

    In fact, I’d be concerned if these loans had a loss rate even vaguely resembling that of prime, because it would mean that an awful lot of people are overpaying for their credit.

    A rise in losses may lead to a reduction in profitability of these loans, but don’t seem to present a risk to the auto-lending industry as a whole. (Although I’m sure there are a couple banks out there that are being particularly stupid and cannot, in fact, handle the loss rate.)

    • 0 avatar

      “I’d be concerned if these loans had a loss rate even vaguely resembling that of prime, because it would mean that an awful lot of people are overpaying for their credit.”

      Someone who actually grasps the concept.

      Just as some insurance companies will sell auto insurance to those who have imperfect driving records, some lenders will rent money to those who have imperfect credit. As long as the portfolio is balanced and the pricing is right, there is no problem.

      Default rates are never zero, and any lender that operates as if they are should not be in business. It becomes a problem when short-term below-average default rates are used to set price and terms; default rates are cyclical, and it should not be presumed that below-average rates are normal.

  • avatar

    I must inquire, Cameron, as to what compelled you to use that photo because not only is Gaede like 10 minutes away from me, but my friend and former GM’s son had sex with the owner’s daughter in on of their cars on the lot at night like seven years ago. #themoreyouknow

  • avatar

    Well, this is comforting. I mean, the rating agencies haven’t steered us wrong before, have they?

  • avatar

    Loaning money to people that can’t afford it, results in unpaid loans?

    Who woulda thunk?

    • 0 avatar
      Big Al From 'Murica

      But it seems like the vast majority of subprime borrowers are paying their loans back in a timely manner. This would lead me to think that they can in fact afford it.

  • avatar

    I would imagine that a lot of these people get tax returns that they could save away for a better car that’s paid for, rather than spending the tax return on something else and turning around and taking out the sub-prime loan.

    I would also imagine that with a little bit of discipline they could pay themselves a car payment and buy a car outright–with cash–or at the very least, finance only a small portion.

    I have done this–I have a (barely) three-year old Chrysler 200 Limited that I own outright. My “car payment” goes to me for the course of ten years, when I will turn around and buy another newer used car–private party–for a steal (problem is, will there be any three-year-old car ten years from now that I will want to buy?).

    I don’t know why people don’t do this. All they need to do is start out with a paid-for, reliable car and pay themselves over the course of three, five or ten years to replace that car and do it all over again. Stick the funds in a high-yielding CD.

    • 0 avatar

      The sub prime customer is often using that tax refund for the down payment already. The other problem is that they often don’t have the paid for reliable car.

      If they had that paid for reliable car they would probably have been managing their credit reasonably, not trying to live beyond their means and it is a good possibility that they wouldn’t be sub prime borrowers.

      Fact is people become sub prime borrowers mainly due to their mismanagement of money. This group will likely be in the hole all of their life. They could buy a nice reliable Corolla or Camry and keep it once it is paid off and then save money for their next car. However they’ll buy that car that stretches their budget to the limit and then trade it before it is payed off.

      Others do get in that situation because of things that may be out of their control, they lost their job and went w/o work for a period of time or they have medical expenses that they can not afford. They may get themselves out of the sub prime world in a few years.

      The other group are those that are just starting out and have no credit. These people may or may not get out of sub prime hell.

      • 0 avatar

        Bingo. Walmart’s hiring, and having to pay above minimum wage – so these folks are dumping their Corollas and Civics, that have plenty of life left in them, and taking out loans to buy new full-size trucks and SUVs. Prices of used economy cars with over 100,000 miles are down from two years ago where I am.

      • 0 avatar

        “They could buy a nice reliable Corolla or Camry…”

        What the hell do you think a typical ‘sub-prime’ buyer is shopping for? Sure, lots of them would love to drive an Escalade, but most dealers won’t actually do that business.

        And yes, many people end up in a sub-prime credit category due to money management issues. Of course, that ‘issue’ can be as simple as 3 months of unexpected unemployment, resulting in 2 late credit card payments and a bill (take your pick, Medical, Phone, even Parking Tickets) being sent to collections. You would be surprised how quickly you can tank a 720-rating without actually making any ‘bad’ decisions.

        Sub-prime exists as a generalized term to describe a category of loan that is written against a perception of higher risk, and it’s telling that it’s quickly losing favor at banks because it doesn’t really mean shit. When you can have a customer who has multiple broken accounts over the last 5 years, and a customer who has a 3 month gap in the last 7, and both of them have the same category of loans, it just makes sense to re-categorize them.

    • 0 avatar

      It’s amusing (and slightly infuriating) that people assume that sub-prime loans are ‘bad.’ If you have a stable income and little to no credit history (aka, a LOT of newly working millennial) not only is a sub-prime loan potentially the only way you can buy a ‘new’ car, it’s a fantastic way to build credit quickly. Make payments on time for 18-24 months, and as long as you don’t have anything terribly bad going on, you will be beating off re-fi offers with a stick. The difference between a sub-prime rate and a more normal rate over 2 years is likely to cost you a few hundred dollars.

      Then again, your suggestion of using a high-yield CD is dubious at best. CD’s have been AWFUL for a half decade now, and they are probably the worst way to ‘save’ money if you are only putting away a hundred or two a month.

      And as for “All they need to do is start out with a paid-for, reliable car” – Seriously? The biggest reason why most people buy a car is actually because they don’t have something reliable. Spend a few hours at a car dealer that does a lot of sub-prime business – real, actual people tend not to sign up for significant loans just to get a nicer ride.

  • avatar
    Big Al from Oz

    A question for our financial and economic wizards on TTAC.

    At what percentage can we start to see a problem with these loans.

    Even though the percentages look small they ticked up over 33% or thereabouts in the last 12 months.

  • avatar

    Eh, still better investment than the college loan system and the government still sees fit to subsidize them. Hooray government!

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