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Subprime Auto Loans an Opportunity for Borrowers and Lenders

12 November, 2011

Last week, this blog (Poor credit auto loans are within reach) reported on research that suggested that lenders are approving more auto loans for people with poor credit. On Thursday, Experian, one of the nation’s big-three credit bureaus, published a new survey that confirmed the trend.

Auto loans for prime and subprime borrowers

People with stellar credit scores could generally obtain auto loans (although some were turned down) even in the darkest days of the Great Recession. However, lesser mortals, who had either good or poor credit reports, frequently found it impossible to finance a car purchase.

The extent to which this has changed was reinforced last Thursday when Experian released new data that showed that the share of auto loans for new vehicles going to subprime borrowers was up by 11.1 percent between the first quarters of 2010 and 2011. People with damaged credit made up 10.57 percent of all buyers during the first three months of this year, compared with 9.81 percent during the same time last year.

The average credit score of new car purchasers in that quarter fell to 766 from 776 a year earlier. In a press release, Melinda Zabritski, Experian’s director of automotive credit, remarked:

As the automotive credit market continues to stabilize, lenders are showing a higher tolerance for risk. Thirty-day delinquencies are at their lowest point since Q4 2008, giving lenders a little more leeway in their loan decisions. Additionally, with lower average scores for new vehicle loans and more loan activity for credit-challenged customers, it is easier to find a loan now than at any time in the past 30 months.

Not all subprime borrowers are bad risks

As reported here last week, many lenders say that they plan to discriminate between subprime borrowers when considering applications for auto loans. They intend to try to identify which are deadbeats and which are fundamentally creditworthy people who’ve experienced–and emerged from–short-term difficulties.

One way in which they could do this was revealed last week by TransUnion, another of the big-three credit bureaus. It found that those who’d previously fallen behind with multiple accounts were more than twice as likely as those who’d been delinquent only with their mortgages to now be 60 days or more behind with their new auto loans. In other words, borrowers who’d let their mortgages slide but had stayed current with their credit cards, and personal, student and previous auto loans were now more creditworthy than those who’d kept up with their mortgages, but fallen behind with multiple other accounts.

Auto loans and mortgages

In some ways this is extraordinary, because credit counselors tend to advise those in trouble to prioritize their mortgages over all other debt. However, the new figures seem reliable, and Steve Chaouki, group vice president in TransUnion’s financial services business unit, sees them as significant for lenders:

There appears to be a pocket of opportunity among mortgage-only defaulters… This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.

Quotes for auto loans

Don’t forget that, whatever your credit score, you can request competitive quotes for auto loans on this site.

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by Ethan Leak

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