Lenders pull back on subprime auto loans as 90-plus day delinquencies rise

Consumers continue to want what they can’t afford

Subprime lending on the decline

In the years following the debt crisis, subprime auto loans remain an ever-present dilemma. Approved applicants for subprime loans, those with credit scores below 620, are on the decline. Since reaching a high of 25.37% in 2015, the percentage of auto loans issued to subprime borrowers has dropped to 19.56%. This figure, recorded for the first quarter of 2017, is the lowest since 2011. While it is certainly advantageous for the overall health of the economy for lenders to be more strict in their selection process, the figures are still alarmingly high if you compare rates before 2009. Subprime borrowers didn’t always have this appetite for new cars when lenders were selling them mortgages instead.

Too late for some

The drop in auto loans is an indication that lenders are taking action to prevent against losing money from auto loan delinquency. Just how bad has delinquency become on subprime auto loans? 90-day subprime delinquency rates reached a 6 year high of 2% in the third quarter of 2016. The volume of loans that were 90 days delinquent by subprime borrowers increased $297 million, compared to a relatively minuscule $39 million for borrowers with a credit score between 620-659.

Car loan amounts increase as Americans continue to spend more than they can afford

The tendency for delinquency after 90 days may be explained in part due to Americans desire to purchase more expensive vehicles. The average amount financed for a new car increased from $25,843 to $29,469 in a four year period from 2012 to 2016. In our modern day society of instant gratification, people are taking on more risk in order to afford the luxury items they crave. The result? The approximate number of accounts that went into 90-day delinquency for subprime borrowers increased by over 8500 over the same period.

Will we learn from the past?

If the sharp increase in delinquency rates doesn’t make you nervous, it should. The auto loan bubble seems to be expanding with each passing quarter. As more people begin to default on their auto loans, the more risk there is for a second debt crisis. New 90-day auto loan delinquency of all credit scores reached a 6 year high of 2.3% in the first quarter of 2017. Since 2012, auto loan delinquency rates have increased by 0.78 percentage points meaning that volume of delinquent auto loans increased $4.01 billion in the last five years. And from 2012 to 2016 that subprime borrower accounts that went into delinquency after 90 days increased by 115,000 accounts!

You know the old adage “fool me once shame on you, fool me twice shame on me”? It seems that the market could be in for a downturn if the more and more people become delinquent on the payments. So remember just because a lender approves you doesn’t mean that you can afford the loan. If you do opt to take out a loan, make sure you understand the payments, interest rates, and have enough savings for at least 6 months of living expenses before committing. Learn more by reading our auto loans guide before making your decision.

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