More subprime buyers are finding loans again.
Last month’s unexpectedly strong automotive sales numbers run counter to most other recent U.S. economic trends and buoy hopes the nation will escape a double-dip recession.
While a variety of factors appear to be propping up automotive demand – despite earlier forecasts of a slowdown – one key reason for the sales surge appears to be increasing availability of financing, especially for so-called subprime buyers.
During the depths of the recession, when U.S. new car sales slipped to a crushing 10.5 million low in 2009, even those with the best credit scores found it difficult to get financing and leases all but vanished. Now, however, the financing situation has turned around.
In fact, there were more subprime loans written in the second quarter of 2012 than in the period before the nation’s economic collapse, according to financial tracking firm Experian Automotive.
But is that posing the risk of future problems down the line, especially if the continuing high jobless rate leads to higher loan defaults?
“Despite the rise in subprime loans overall, there is still a strong sense of managing risk,” said Melinda Zabritski, director of automotive credit for Experian Automotive. “Because the overall lending environment has improved, lenders are making loans available to a wider range of customers. This is good for manufacturers and dealers, as it allows them to sell more vehicles. However, the lower loan-to-value ratios show that lenders are not willing to throw caution to the winds.”
Though August data are not yet available, recent trends are obvious, noted Experian, which reports loans to “credit-challenged” buyers shot up 14% year-over-year during the second quarter. Buyers classified as nonprime, subprime and deep subprime accounted for 25.41% of all new vehicle loans during the second quarter.
Getting those buyers back in the market has been critical, according to various industry officials. As the latest numbers show, there was a huge segment of potential buyers who were simply shut out – or forced to downgrade to whatever they could afford to get in the used car market, often dealing with self-financing dealers at exorbitant rates.
The return of the subprime buyer is apparent, according to Ricky Beggs, of Black Book, in the age and mileage of the vehicles now being traded in for new vehicles. Many are over 10 years old and have odometer readings of 150,000 miles or more.
It’s not the first time the market has counted on subprime buyers to give it momentum. Such customers helped push U.S. sales to record levels a decade ago. But some makers took things a bit too far and ultimately paid a steep price.
Mitsubishi ran up close to $1 billion in losses due to various programs, such as its “NINJA” loans, short for “no income, no jobs or assets.” One of its campaigns allowed young buyers to forego payments for a full year. Unfortunately, when it came time to start making monthly installments many simply handed back the keys.
But that doesn’t seem to be a worry, at least not right now. If anything, a new study by Experian competitor TransUnion finds that credit defaults on automotive loans have dipped for the last two quarters – and during the second quarter of this year dipped to the lowest level since the company began tracking auto default data in 1999.
During the most recent quarter, the percentage of buyers two months behind on payments fell to 0.33%. A year ago, that was 0.44%, TransUnion says.
“Consumers now value their auto loans more than their credit cards and mortgages,” Peter Turek, automotive vice president in TransUnion’s financial services business unit, said in a statement. “This is partly due to the need for transportation to get to work or to seek employment.”