Surging delinquencies on auto loans accompany the recent boom in auto sales. Title loans for automobiles are also becoming increasingly popular among U.S. consumers. Securities-backed subprime auto lines have become more attractive as dealers depend increasingly on customers with poor credit to average records. As the loans soared to their highest level since 2009, they have become the only hope for many people who need a motor vehicle to work and care for their family.
Sub-prime lenders charge above-average interest rates as compensation for the risk they take financing drivers with questionable credit backgrounds. Unfortunately, the resulting high payments make life tough for people who already have difficulty making ends meet.
Experian Automotive, a branch of the well-known credit bureau, recently reported that sub-prime and deep-sub-prime borrowers, having FICO credit scores between 300 and 620, account for slightly more than one-fifth of all auto loans. Meanwhile, recent statistics indicate that about five percent of subprime car loans have become two months delinquent.
Analysts monitoring the automotive industry hesitate to describe the current sub-prime situation a major concern, but a continued dependency on sub-prime financing instruments for increased sales could result in problems for many lenders. As recently as this past January, the annualized net rate of loss for sub-prime auto lenders approached nine percent. Analysts expect losses to hover near ten percent by year’s end.
Finance companies looking for ways to extend credit to a larger pool of borrowers have worsened the situation by offering loans that last seven years or longer. In many cases, buyers owe more than the value of their car within a couple of years of their purchase, causing problems for vehicle owners when they need to trade-in their vehicle to buy another one.
Unlike the variable-interest loans that ultimately caused the recent collapse of the housing market, the loans fueling the boom in auto sales come with fixed interest rates. The interest rates and monthly payments continue to dog vehicle owners who often must skip a payment to pay for maintenance or repairs. They may take out a payday loan or cash advance for the short term issue. Similarly, people who lose their job or miss work due to sickness often do not have enough cash reserves to continue making their loan payments.
Echoes of the housing market crisis, however, persist, despite the different circumstances. Problems with subprime auto loans escalate when companies bundle the loans and sell them to investors as securities. Details reminiscent of the movie, “The Big Short” could soon emerge, setting the stage for the collapse of the industry as the most vulnerable loans fall into delinquency. Thomas Curry, the U.S. Comptroller of the Currency, has been one of the watchdogs that have expressed concern about the current state of the market, comparing it with that of the housing market of yesteryear.
Increased demand for automobiles, stimulated by a wave of drivers needing to replace their aging vehicles, has caused the recent boom in sales. According to the Federal Reserve Bank of St. Louis, drivers in the U.S. held more than one trillion dollars in auto debt at the end of last year. Subprime borrowers accounted for about $200 billion, one-fifth of the total.
With the recent boom in sales and the risks of lending to sub-prime borrowers increasing, lenders are still lending money. Although analysts will keep their eye on the net loss, credit requirements are still more strict than they were before the 2008 housing crisis. Personal loans and installment loans are still a great choice if you need an extra $2-5K in cash now to help with making a move in certain situations. At the end of the day, lenders are still making large interest rates and the defaulting property is sold so the bank can get out from under the bad loan and open a new one. Rinse and repeat. Banks are still lending and our partner lenders seems to have no shortage of approvals.