Third-quarter reports show subprime vehicle loans represent a smaller percentage of the auto loan market compared to the past five years. Credit tracking company Experian claims that this statistic should alleviate recent concerns about the auto loan market.
Some experts have been predicting a bursting bubble for the automobile lending industry, much like the one that hit the housing industry about 10 years ago. This spurred many lenders to start pulling back on lending and tightening their underwriting standards.
However, these third-quarter figures show that while subprime auto lending appeared to be increasing, lending to other consumer groups has risen with it. In other words, things are rosier than they appear.
According to this data, the subprime loans are actually a smaller percentage of the whole industry than in the past, giving an indication that the health of the industry is better than previously thought.
What Was the Percentage of Subprime Borrowers in the Third Quarter?
Just over one-fourth of borrowers fell into the subprime or deep subprime category of loans. The precise figure was 25.67. The consumers with the lowest credit scores, who are in the deep-subprime category, has dropped to only 4.64 percent of all auto loans. That is the lowest that rate has been in recent years.
“The market turning more prime is an encouraging trend,” said Melinda Zabritski, Experian senior director of automotive finance.
The one worrisome figure to come out of Experian’s statistics is that consumers seem to be extending the amount of time it takes to pay off their vehicle loan. Which has been backed up by previous coverage on LendEDU. This quarter had an all-time high of the average length of a vehicle loan at 69 months. Unless a consumer gets a zero-percent interest loan, stretching out the life of the loan to almost six years isn’t a great financial decision, and it’s also viewed as a greater risk to a lender.
What Are Subprime Vehicle Loans and Who Needs Them?
Subprime vehicle loans are high-interest loans that are offered to customers who wouldn’t be able to qualify for a normal lower-interest car loan. Because of a spotty payment record, not having enough credit history, or a low income-to-expense ratio, those customers aren’t eligible for the low-interest rates landed by those with better credit ratings.
The borrowers with the lowest credit ratings can sometimes pay as much as 20 percent interest rates on their auto loans. While no one enjoys paying high-interest rates, people need to have vehicles for transportation to and from work and school, especially if they live in areas of the country which don’t have public transportation.
The third-quarter figures showed an increase in loan size, on average, for new vehicles. In 2016’s third-quarter report, consumers were financing $291 less than they were in this year’s third quarter. Consumers financed an average of $30,329 for new vehicles in the third quarter.
The increase for used vehicles was more modest, having reached just $56 more than in the third quarter of 2016. The 2017 third-quarter’s average total was $19,291.
Monthly payments were similar from year to year for both new and used vehicles. Owners of new vehicles paid an average of $502 each payment. As expected, used vehicles were considerably lower at $365 per payment.