As subprime auto loan defaults soar, investors scramble for the door

Inside Subprime: December 26, 2017

By Caroline Thompson

Subprime auto loans are defaulting at an alarming rate, and private equity firms, which invested so heavily into them after the financial crisis are feeling the pressure to get out ASAP. Unfortunately, it’s not going to be that simple.

The subprime auto loan bubble has been poised to pop for a while now. Back in July, the merger between Fiat Chrysler Automotive and Spanish lender Banco Santander made headlines when information from court documents and interviews with industry insiders revealed that many lenders were using outright predatory tactics on subprime borrowers. Some dealers purposely pushed high-cost loans on low-income borrowers who are at a high risk of default, and according to S&P, Santander lenders verified the income of just 13.8 percent of auto loan borrowers in a September 13th sale.

And it seems all this lax regulation has finally started to catch up to the subprime auto loan industry. After investing billions of dollars into auto finance, and profiting greatly off the high interest shoved onto the backs of subprime borrowers, buyout firms are starting to realize their dilemma: while it was easy to get into the subprime lending game, as car purchases fall and delinquencies rise, it may not be so easy to get out.

According to The St. Louis Post-Dispatch, defaults on subprime auto loans made by small private equity firms have now reached crisis levels. Big banks are pulling back from the business, and state regulators are investigating the many claims of predatory lending plaguing the industry.

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” Chris Gillock, managing director at Colonnade Advisors told the St. Louis Post-Dispatch. “Right now, it’s about as out-of-favor a sector as I can think of.”

Since 2011, subprime auto loans to people with credit scores under 620 have increased by 72 percent. In 2016, about 20 percent of all new car loans were subprime, a record high. After years of loosening lending standards in order to expand their businesses, smaller lenders are now finding it difficult to get big banks to back their loans.

“From a standpoint of subprime auto right now, if you’re small, people aren’t lining up,” said David Knightly, vice-president at Innovate Auto Finance. “Everybody’s trying to guess when the next 2008 is.”

For more information on subprime auto lending, check out these related pages and articles from OppLoans:

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