'Deep Subprime' Auto Loans Are Becoming the New Normal

Matt Posky
by Matt Posky

A third of all subprime car loans are now being categorized into the ominous-sounding “deep subprime” group. The designation has become progressively more inclusive since America clawed its way out of the recession and now accounts for 32.5 percent of all high-risk loans — up from just 5.1 percent in 2010.

While consumers have fallen behind on most subprime auto loans, the deep classification is responsible for the most serious cases of nonpayment. Delinquencies surpassing 60-day periods have tripled since 2012 and indicate little sign of stabilizing.

“The securitization market has become more heavily weighted towards issuers that we would consider deep subprime,” Morgan Stanley financial strategists wrote in a recent report. “Auto loan fundamental performance, especially within ABS pools, continues to deteriorate.”

Morgan Stanley defines deep subprime borrowers as lenders with FICO scores below 550. The Fair Isaac Corporation doesn’t have a strict categorization for the group, but the general consensus is that anyone with a score below 600 is considered a high risk. That’s a problem as younger buyers typically have lower scores and are less interested in making the kind of financial decisions that might raise their ratings. They’re also less likely to have a steady income or cash reserves, but they’re flooding into the market as comparatively well-off boomers leave it. Someone has to drive the new cars being produced every year, and used vehicles still remain at a premium.

The $3 billion cash-for-clunkers program from 2009 obliterated the cheaper end of the used vehicle market to the detriment of America’s lowest income earners as used vehicles they could have afforded were largely removed from the market. This forced those buyers to scrounge enough money together to buy something more expensive or risk going deeper into debt by taking out a loan they might never be able to afford.

Banks have also become more willing to underwrite riskier auto-loan asset-backed security sales. According to Bloomberg, that translates to investors taking a huge hit, with about $8 trillion of debt globally carrying negative yields, further facilitating higher levels of risk in the securities market. It’s a bad time to be unprofitable. Used car prices are expected to come down soon and new car sales seem to have plateaued.

Subprime consumers won’t care if lenders get screwed. All they want is a used Nissan Altima that won’t require them to take on a massive loan, because the alternative isn’t pretty.

Matt Posky
Matt Posky

A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.

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8 of 185 comments
  • PandaBear PandaBear on Mar 30, 2017

    It's the interest rate, plain and simple. When interest rate is 0, someone will be buying high risk ABS because taking a chance on the higher risk for a higher return will still make more money than taking no risk and get less return. Plus today we have GPS kill switch, that reduces risk quite a bit. Plus today's cars are made better and last longer. So they can offer a longer term. Plus used car prices are still ridiculously high, so the repos would still worth more. Plus trump would raise tariff and destroyed the parts supply chain of today's auto manufacturing business, that'll reduces the supply and increase future production cost, reducing production level. That makes car more expensive and used cars worth more. Calm down guys, things will be alright.

    • Lou_BC Lou_BC on Mar 30, 2017

      "Calm down guys, things will be alright." The sun will come out tomorrow, if you can see it through the smog ;)

  • JD-Shifty JD-Shifty on Apr 01, 2017

    wow. highdesertcat and markf are gullible right wing idiots.

  • Kwik_Shift_Pro4X The push for EV's is part of the increase in our premiums. Any damage near the battery pack and the car is a total loss.
  • Geozinger Up until recently this was on my short list of cars to replace my old car. However, it didn't pass the "knee test" with my wife as her bad knee makes it difficult for her to get in and out of a sedan. I saw a number of videos about the car and it seems like the real deal as a sporting sedan. In addition I like the low price, too, but it was bad luck/timing that we didn't get to pull the trigger on this one.
  • ToolGuy I agree with everyone here. Of course there are exceptions to what I just said, don't take everything so literally. The important thing is that I weighed in with my opinion, which is helping to move things forward. I believe we can all agree that I make an important contribution (some will differ, that is their prerogative). A stitch in time saves nine. Life isn't fair, you know. I have more to say but will continue at our next meeting. You can count on that, for I am a man of my word. We will make it happen. There might be challenges. I mean, it is what it is. This too shall pass. All we can do is all we can do. These meetings are never really long enough for me to completely express all the greatness within me, are they? Let's meet to discuss. All in a day's work. After all, Rome wasn't built in a day. At the end of the day, I must say I agree with you. I think you will agree. When all is said and done, there is more said than done. But of course that is just one man's opinion. You are free to disagree. As I like to say...(I am working on my middle management skills -- how am I doing?)
  • Golden2husky Have to say he did an excellent job on the C7, especially considering the limited budget he was given. I am very happy with my purchase.
  • Marty The problem isn't range; it's lack of electricity in multi-unit building parking. All you need is level 1 - a standard 120v wall socket - and if you're plugged in 10 hours overnight you get 280 miles per week or more. That's enough for most folks but you can use public charging to supplement when needed. Installing conduit circuits and outlets is simple and cheap; no charge stations needed.