Sub-prime Borrowers May Get Bounced Out of the Club Next Year
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.
More by Aaron Cole
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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.
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.