'Deep Subprime' Auto Loans Are Becoming the New Normal

Matt Posky
by Matt Posky
deep subprime auto loans are becoming the new normal

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.

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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.

  • Del My father bought GM cars in the 60's, but in 1971 he gave me a used Datsun (as they were called back then), and I'm now in my 70's and am happy to say that GM has been absent from my entire adult life. This article makes me gladder than ever.
  • TheEndlessEnigma That's right GM, just keep adding to that list of reasons why I will never buy your products. This, I think, becomes reason number 69, right after OnStar-Cannot-Be-Disabled-And-It-Comes-Standard-Whether-Or-Not-You-Want-It and Screw-You-American-Car-Buyer-We-Only-Make-Trucks-And-SUVs.
  • 3SpeedAutomatic Does this not sound and feel like the dawn of ICE automobiles in the early 20th century, but at double or triple speed speed!!There were a bunch of independent car markers by the late 1910’s. By the mid 20’s, we were dropping down to 10 or 15 producers as Henry was slashing the price of the Model T. The Great Depression hit, and we are down to the big three and several independents. For EVs, Tesla bolted out of the gate, the small three are in a mad dash to keep up. Europe was caught flat footed due to the VW scandal. Lucid, Lordstown, & Rivian are scrambling to up production to generate cash. Now the EV leader has taken a page from the Model T and is slashing prices putting the rest of the EV market in a tail spin. Deja vu……
  • Michael Eck With those mods, I wonder if it's tuned...
  • Mike-NB2 I'm not a Jeep guy, but I really, really like the 1978 Jeep Cherokee 4xe concept.