Subprime Loans Remain Elusive

Subprime share continues to shrink, as auto lenders load up on high-score, low-risk loans to prime (660 to 719 credit scores) and “super-prime” (720-plus credit score) customers, according to the second-quarter Household Debt and Credit Report from the New York Federal Reserve Bank.

Simply stated, those with subprime credit may not qualify for loans while F&I managers find those with prime and super prime credit are swiftly approved.

In the second quarter, auto originations totaled $179 billion, down 10% vs. the second quarter of 2022. The New York Fed uses the term “auto loans” loosely, to cover loans and leases on new and used vehicles.

Volume is down the most for borrowers in the credit-score ranges below prime and just above the cutoff for prime.

Subprime-loan originations totaled $29.8 billion in the second quarter, down 15.8%  vs. a year ago. The New York Fed defines subprime as a credit score of 620 or below. In the range of 620 to 659, originations reached $18.5 billion, down 21.9%.

Those credit-score ranges lost share in the second quarter, while the high end gained share. For example, borrowers with near-perfect credit scores of 760-plus accounted for 35.6% of second-quarter originations, up from 32.8% a year ago, the New York Fed says.

In a separate conference call to announce second-quarter earnings, auto lender Ally Financial says it is pursuing “super-prime” loans in part because there’s less competition after some banks quit or reduced indirect auto loans — indirect means loans via dealerships, as opposed to direct-to-consumer loans.

Less competition means Ally and other big banks that stick with indirect auto lending, such as Chase Auto Finance and Capital One, can keep margins higher than they would otherwise, says Jeff Brown, CEO for Detroit-based Ally.

In June, Citizens Financial Group, Providence, RI, reported it would stop originating indirect auto loans and wind down its existing $11.5 billion auto-loan portfolio. Citizens says it will continue to service the loans.

In July, Cincinnati-based Fifth Third Bank said it would reduce its indirect auto-loan footprint to its core region and exit some Western states where it had expanded.

“Disruption in the market has enabled us to capture super-prime share with minimal change in price,” says Ally’s Brown.

“Returns in this segment are significantly higher than normal, and we’ve taken the opportunity to optimize risk-adjusted returns,” Brown says. “This shift demonstrates the benefit of our scale and ability to adapt to market conditions.”

In a separate earnings call, Chuck Lietz, senior vice president of finance for Lithia & Driveway Motors, Medford, OR, says some customers have to settle for a less-expensive vehicle. But he says the average Lithia customer has a credit score in the “mid-tier prime” segment, which means financing is more easily obtained.

Lithia reports the average weighted credit score for loans originated by its in-house, e-commerce captive finance company, Driveway Finance, was 730 in the second quarter, up from 718 a year ago.

“Most of our consumers are able to get financing,” Lietz says. “But we are seeing a little bit higher percentage shift vehicles, where they might have to move off the vehicle initially started on onto a more affordable vehicle.”