‘Deep’ subprime car-lending delinquency rates hit pre-crisis levels.

Inside Subprime: August 16, 2017

By Caroline Thompson

The subprime auto loan industry is booming right right now, bolstered by both increased investor interest and lax borrowing standards set by lenders looking to make a quick buck. In general, subprime loans are defined as loans given to borrowers with credit scores below 600, who are at a high risk of falling behind on payments or defaulting on their loans. Right now, about a third of all subprime auto loans are considered deep subprime, a term used to define loans given to borrowers with credit scores of 550 or below.

Unfortunately, these deep subprime loans have seen a sharp uptick in delinquency rates during recent months. According to credit reporting bureau Equifax, deep subprime car loans are currently at levels last seen in 2007, just before the start of the financial crisis. While auto loan delinquencies across all credit scores have been steadily rising since 2012, last quarter saw a significant jump in deep subprime delinquencies that has economists worried.

In an email to Bloomberg reporter Adam Tempkin, Chief Economist Amy Crew Cutts said what stood out to her about the deep subprime delinquencies were the loan issuers. “Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.” Cutts said the younger lenders doing the bulk of the deep subprime lending are typically working directly with dealerships, and are more likely to take a chance on a riskier borrower, or even push subprime borrowers towards longer-term, more expensive loans.

For example, Fiat Chrysler’s partnership with Spanish bank Banco Santander has recently been under fire for irresponsible lending practices, after court documents and interviews with industry insiders revealed that fewer than one in ten borrowers from these companies were properly vetted to verify their income, debt levels or job histories.

While the rise in deep subprime defaults is troubling, we probably don’t need to start preparing for another financial apocalypse just yet. Cutts says that the the real trouble occurs when lenders and investors get over-confident about lending to risky borrowers. For now, these high-risk dealer funded loans only make up for about 4 percent of the entire auto loan market, and Cutts says that risk in auto lending is, in general, very balanced.

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