By on August 27, 2015

 

Next year may not be as kind to new car buyers with bad credit.

If you’ve been paying attention to the market recently, it’s been an up-and-down ride for the past few days. Market volatility is just one of the indicators that the Federal Reserve may be considering a hike to the federal funds rate (probably not this year, though), which would impact borrowing rates in a record-setting year for the auto-loan business. 

“It has the potential to impact auto loans, any rate increase certainly can,” said Melinda Zabritski, senior director for Automotive Finance for Experian. “The rate depends on so many other factors in the market … (A rate increase is) at some point, likely. But there’s not a strong chance that it will go up this year.”

Rates for loans have largely stayed the same since 2008, when interest rates were lowered to spur lending after the recession. Many of the low-rates today haven’t changed and automakers such as Subaru have offered interest-free loans on some of their cars.

“If you’re not a high-scoring consumer, the likelihood of obtaining those (good) rates and programs is more of a risk. There’s not a lot of chance of getting them if your score is under 600,” Zabritski said. “The new vehicle market is a very prime market.”

But that may all change by next year.

According to Experian, sub-prime borrowers (with credit scores between 500-600) and deep sub-prime borrowers (with credit scores lower than 500) comprise 34 percent of used car loans. Non-prime borrowers (between 600-700) are roughly 20 percent of that market, with prime and super-prime buyers comprising the rest.

Non-prime buyers may be considered sub-prime depending on market conditions and the lender.

Any rate hike would likely impact lower-tier borrowers, either making the loan unaffordable or by lenders tightening up their availability to reduce risk.

“The lenders are out there now, they have money to lend. If you were someone trying to buy a car in 2009, money was hard to come by. If you’re getting a loan today, certainly you have a lot of financial options,” she said.

Deep sub-prime and sub-prime borrowing were the second and third-fastest growing loan segments behind super-prime borrowers. Interestingly, super-prime borrowers received less money from lending companies than many other categories.

Zabritski said the federal funds rate is dependent on many factors including GDP and market conditions, so it’s hard to predict any swing in the rates.

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21 Comments on “Sub-prime Borrowers May Get Bounced Out of the Club Next Year...”


  • avatar
    Tosh

    I don’t believe it…

  • avatar
    Rday

    I don’t believe it either. the feds will most likely bail out the big banks one again as their wasteful ways create another bubble. our government is just as corrupt as the big banks and they will always protect the guys that give them the the most money.

  • avatar
    Lack Thereof

    The headline is not likely. Not likely at all.

    Subprime is the most profitable lending space. It would take a hell of a lot of turmoil to get lenders to pull out of their most profitable market.

    And car loans are some of the safest loans lenders can make; they’re collateralized (by the car), and the default rate is absolutely tiny compared to other types of loans. Subprime borrowers have historically shown that they will let nearly every other bill go unpaid before risking a auto repo.

  • avatar

    First, her name is Melinda, not Belinda.

    Second, there is little or no danger of less than prime borrowers not having access to credit next year UNLESS there is another credit freeze caused be a lack of liquidity in the market.

    Third: A large part of the sub prime market is Buy Here Pay Here. Those loans don’t show up in bank loan data.

    Car loans ARE safe loans. People need their car to get to work and buy groceries. In some cases, they might even be forced to live in their car for a spell.

    Trying to draw a comparison between the mortgage crisis and sub prime auto loans is merely lunacy and indicates a whole lot of ignorance. If someone can intelligently explain what a credit default swap is, they typically will not be making any mortgage loan/sub prime auto loan analogies.

    • 0 avatar
      Aaron Cole

      To your point:

      1. You’re right. Melinda.

      2. I didn’t say there’d be a credit freeze. The issue is whether or not loans would be affordable if the fed hikes its rate. Money is cheap now and loans are available. If money isn’t as cheap, they money may still be available, but not as affordable.

      3: I can’t say whether buy-here-pay-here loans are a “large” part. I can say that according to Experian, around $900 million in loans were issued in Q2 2015 by four sectors of the loan business that aren’t buy-here-pay-here. It seems like a large part of the auto loan business is still financial, bank, captive or credit unions.

      • 0 avatar
        VoGo

        It’s a leap of faith to correlate the very short term rate that the Fed lends in the wholesale market to medium term car loan rates. It’s a bigger leap of faith to correlate tightening credit standards with rising Fed Funds rates.

      • 0 avatar

        When non Super Prime lending shut down in 2008 – 2009, it was because there was no liquidity available to provide it. It wasn’t a matter of rate. There is enough slack in sub prime and BHPH that a point or two won’t make a lot of difference, but you should check historical data going back BEFORE the most recent financial crisis. A couple points of interest doesn’t make a whole lot of difference on these kinds of deals.

        BHPH is still “niche” but its a major part of subprime and data isn’t easily available for it. There is also LHPH. A big player there is DriveTime. You typically won’t see data on individual LHPH deals because they take out huge warehouse lines of credit for those deals and the title stays in their name.

        • 0 avatar
          87 Morgan

          A good portion of the sub prime lending today occurs already at state limited usury rates, so an increase in the fed rate is immaterial. What would be detrimental to the dealer would be if the sub prime banks raised their acquisition fees to offset an increase in there borrowing costs that can’t be passed on to the consumer.

          • 0 avatar
            John

            Dealers don’t have sacks of money in their back room. They borrow money for their inventory and expenses. Their profit largely depends on the spread between the rate of the loans they originate – which, as you note, are limited by the state, and the rate they pay on their loans – which fluctuate according to the fed rate. The less they make on the spread, the more cautious they have to be.

          • 0 avatar
            87 Morgan

            John very typical on sub prime loans have NO rate spread, dealer will have to pay the bank an acquisition fee, or discount to get the loan funded.

            On decent credit and above, you are correct though.

  • avatar
    Felix Hoenikker

    In June of 2014 I was in the process of purchasing a new Honda Accord. We have near 850 credit and no debt so I don’t pay too much attention to loan interest rates.
    I went to the local Honda dealer on a Saturday afternoon after several previous visits expecting to place a deposit on the Accord if we could agree to a price. Lo and behold, they were hell bent on completing the deal that day. They also pushed financing through Honda. So I agreed to buy the car that day with a $10K down payment and take a loan for the roughly $12 remainder for 3 years at 1.99% interest. I told the salesman that I could probably get a better rate from my credit union, but he said it would really help him if I financed through Honda. I was free to pay off the loan after two months.
    My credit union was offering 36 month car loans at 0.99% interest so I refinanced two months later. To me that interest rate is free money. The long term inflation rate is slightly over 2%.I’m no financial genius, but these rates are too good to pass up as my long term capital returns exceed 8%.
    This is all a result of the Fed trying to stimulate a zombie economy by keeping interest rates at crazy low levels.I don’t know what the unfortunate bastards at BHPH lots are paying, but IMHO anything over 5% is legal extortion.

    • 0 avatar
      87 Morgan

      Anything over 5% is extortion? Yeah, ok. With that mind set we would have an economy that rivaled the one in Cuba.

      I can only assume you have zero dealings with the general public. 21% for some is a gift.

      Interest rate, by definition, is a measure of risk. The higher the rate, the higher the risk for the one lending the money. Borrowers are free to shop around, but many find their only option is a high rate as they have demonstrated a lifetime commitment to making poor choices. Again, their choice. It is only extortion if they are forced to take the rate/loan against their will. The consumer is free to leave at any point if they don’t like the deal.

    • 0 avatar
      Lack Thereof

      Lots of people are paying well into the 20% range through traditional lenders (into the 30’s where state laws allow). A large segment of this market is on 48 or 60 month loans as well.

      BHPH loans tend to be structured to fail after a few months, allowing dealers to sell & repo the same low-value car over and over again, as each buyer falls behind a few months in. This lets BHPH lots just keep collecting $2000 down payments over and over again on the same $5000 car. They tend to keep copies of the keys of every car they sell to make the repos easier.

      It’s also not unheard of for BHPH places to write high-interest loans with interest-only minimum payments, so that even if a buyer pays every month on time, the unwary end up never owing any less.
      Conventional dealers tell horror stories about BHPH trade-ins in this situation. You hear of customers who’ve been making payments on a used Corolla or Civic at a BHPH lot for 3 years, and want to trade up. The trade-in dealer calls the BHPH lot for the payoff amount… and it’s the original purchase price. The car owner had no idea, never read the fine print.

      • 0 avatar

        Structured to fail? The people buying these vehicles have failed at anything credit wise most of their life. Exceptions are those who fall into the category of “bad things happen to good people.” Most don’t know how to pay attention, let alone a payment. These days there is no such thing a cheap used vehicle inventory. And curing laws mean a dealer has to allow a cure before it can be sold again AND it needs to be sold at auction to establish the deficiency. Collection costs are enormous. For those of you who think you know so much about this business, I suggest you put up your own capital and try it for a while. It will be a revelation and will actually turn you into REAL experts, not theorists.

        • 0 avatar
          Lack Thereof

          Using all your salesmanly power to encourage someone to take a loan when you KNOW they can’t keep up on the payments counts as “structured to fail,” in my book. And that’s the buy here / pay here modus operandi.

          Curing laws vary state by state. In most states, putting it back for sale on the original lot, so long as it is publicly advertised, is sufficient.

          Yes, a debtor who’s paid the car down a significant amount COULD sue the BHPH lot for the surplus from resale… but in practice this never happens, for the same reason that the debtor didn’t read the fine print in the first place. If every defaulted borrower pursued the lot for their surplus, the lot would be out of business overnight. These BHPH places are banking on having customers who do not understand credit or the law.

          Collection costs? Who cares! BHPH collection costs begin and end with repoing the vehicle. And they do the repo in-house, so they don’t have to hire any outsiders.

          Bottom line – I’ve been a major parts supplier to the shadiest of shady used car lots in western Washington. I’ve seen BHPH’s sell & repo the same vehicle 3, sometimes 4 times a year. The cars aren’t what they’re really selling. They’re just bait to get a customer in, get a down and a couple months payments, then wait for them to default and sell the car again to a new sucker. Rinse and repeat.

          Buy here / pay here is a completely different world from regular car sales.

  • avatar
    Felix Hoenikker

    I’m no expert on auto loans. However, I have had conversations with a local judge whom I financially supported for election despite the fact that he is of the wrong political party (IMHO). We both agree that the banksters have gotten away with way too much and need to be brought back into line. If it takes physical intimidation so be be it.
    I anxiously look forward to a request for jury duty for a civil or criminal case where I can take control of a jury as I have in the past to reek justice on those who use the bought and paid for state assembly in the interest of the well funded business interests who control our state level political process.
    I say bring it.

  • avatar

    The Market hasn’t been an “up and down ride”.

    The truth is that the market HAS BEEN DOWN SINCE 2008.

    That fake nonsense you read when you see the DJ or S&P is an illusion artificially inflated by businesses investing in businesses. It does not represent “main street”.

    The Fed couldn’t bare the political pain of letting the recession play out so they lowered interest rates to 0% and let them sit there entirely too long.

    When I was a kid in the 80’s I had a 10% interest rate on $2000.
    Now I sit with massive amounts of cash in the bank earning pennies on the dollar.

    IT’S A TRAP to trick people into investing into the “market” instead of letting the money sit in the bank.

    Problem is, there is no more “market”. It’s all government control. PRC lying about everything and hiding the truth from investors. China’s investors are pulling their money. Rich people are pulling their money. They, along with hedge funds are buying up real estate and renting it out.

    Worse yet, the countries buying and holding onto American dollars as a reserve currency must not realize America is technically bankrupt and if and when they ever bring that money here to spend it we’ll see hyperinflation.

    The problem is that now, the Fed can’t raise the rates or else they’ll throw everything (including home foreclosure) into chaos.

    They can’t lower rates any lower because I’m sure they’d never want to actually “pay me” to take out money for a Hellcat.

    I plan on buying an office space because I’m starting an LLC next quarter. (no kidding).

    This government leadership is PATHETIC.

    VOTE TRUMP 2016.

  • avatar

    RE: “We both agree that the banksters have gotten away with way too much and need to be brought back into line. If it takes physical intimidation so be be it.”

    Who exactly are “the banksters?”

    RE: “The truth is that the market HAS BEEN DOWN SINCE 2008.”

    No, the market has made a dramatic recovery.

    RE: “IT’S A TRAP to trick people into investing into the “market” instead of letting the money sit in the bank.”

    Trick? Do you smoke a lot of dope? It is what it is and its right in front of everyone. But perhaps you think you would be a better reserve chairman than Janet Yellen or Ben Bernanke? As it turns out, almost anyone would have been a better Fed Chairman than Ayn Rand protege Alan Greenspan.

    Not only will Trump not win, but he will scar the Republican Party even more than they scarred themselves under W. Bush.

    • 0 avatar

      Ruggles.

      If you’re so smart and can criticize me so easily, then why am I wealthier than you are?

      I started on a minimum wage job at Mobil Mart across the street from High School and I HAVE MY RETIREMENT SET IN STONE at AGE 34.

      Smoking DOPE???

      Insults make me laugh. That’s why my YouTube channels generate over $2000 a month on their own.

      Smoking DOPE?

      Yeah OK. You keep laughing at me and I’ll keep CASHING FAT CHECKS.

      • 0 avatar

        I criticized what you said. But if wealth is what determines truth, both Trump and Buffet are wealthier than either of us. Funny, they don’t agree. But you seem to be hell bent on immature adolescent penis measuring. That kind of thinking is what might have gotten you to some of your ridiculous conclusions. I guess in your world, money on deposit at .5% and $2K YouTube checks are “fat.”

        Even Trump knows who melted down the global economy. He also knows the market crashed in 2008 and has recovered nicely. We’ve recently had a hiccup, not another crash. And your other “conspiracy” theories are equally inane. With your kind of thinking you assets are anythingbut set in stone.

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