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 of 620 or lower — 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%.
Recorded for the first quarter of 2017, this figure is the lowest since 2011. While it’s certainly an advantage for the overall health of the economy when lenders are more strict in their selection processes, 19.56% is still alarmingly high if when compared with rates before 2009. Subprime borrowers didn’t always have the appetite for new cars when lenders were selling them mortgages instead.
Too late for some
The drop in auto loans indicates that lenders are taking action to prevent losing money from auto loan delinquency. Just how bad has delinquency become for subprime auto loans? Ninety-day subprime delinquency rates reached a six-year high of 2% in the third quarter of 2016. The volume of loans held by subprime borrowers that were delinquent 90 days increased to $297 million, compared to a relatively minuscule $39 million for borrowers with credit scores of 620 to 659.
Car loan amounts increase as Americans continue spending more than they can afford
A tendency for delinquency after 90 days may be explained in part due to consumers’ desire for more expensive vehicles. The average amount financed for a new car increased from $25,843 in 2012 to $29,469 in 2016. In today’s society of instant gratification, people are taking on more risk to afford the luxury items they crave. The result? The number of accounts that went into 90-day delinquency for subprime borrowers increased by more than 8,500 over the same four-year period.
Will we learn from the past?
A sharp increase in delinquency rates should make you nervous: As more people begin to default on their auto loans, there’s more risk for a second debt crisis. The auto-loan bubble seems to expand with each passing quarter.
New auto loan delinquencies of 90 days across all credit scores reached a six-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 the volume of delinquent auto loans increased $4.01 billion in the last five years. And from 2012 to 2016, subprime borrower accounts that went into delinquency after 90 days increased by 115,000 accounts!
It sounds like the market could be in for a downturn if more people continue to become delinquent on their payments. The takeaway: Just because a lender approves you for a loan doesn’t mean that you can afford its payments. If you opt to take out a loan, carefully read the terms and conditions to understand your potential payments and interest rates, and ensure that you have at least six months of savings to cover living expenses before committing.
Learn how to compare your options before deciding on a loan with our auto loans guide.