Subprime Originations Rise

The cyclical decline in auto loans to borrowers with subprime credit could be bottoming out at last, as the latest Household Debt and Credit Report from the New York Federal Reserve shows an increase in the subprime share of auto-loan originations in the third quarter of 2024 vs. the same quarter a year ago.

The just-published third-quarter report makes it four quarters in a row that’s happened — and something which hasn’t happened since the beginning of the COVID-19 pandemic, according to New York Fed statistics

A comeback in subprime share is good news for dealers seeking to find lending approval for subprime credit borrowers.

Subprime share fell during the new-vehicle shortage through the worst of the pandemic. Customers were lined up to buy whatever was available at almost any price.

Many new-car shoppers switched to used cars and drove up used-car prices, too. What’s changed is that new-vehicle supply is healthy again, and new-vehicle incentives are on the rise. In turn, that’s having a trickle-down effect on used-car prices.

Dealers report separately that, as usual, credit availability has remained good for borrowers with good credit. And while subprime credit applications are still funded and bought by lenders, dealers say choices are limited for customers with low credit scores, leading some to settle for older vehicles.

“We’re encouraged to see affordability improving, with a notable shift to used vehicles priced under $20,000 per unit,” says Michael Manley, CEO of AutoNation Inc., in a third-quarter earnings call.

Overall, the New York Fed reports $184.2 billion in auto originations in the third quarter, an increase of 2.7% vs. Q3 of 2023. That includes financing for new and used, loans and leases, for all credit tiers.

Subprime originations totaled $31.2 billion in the third quarter, the New York Fed says, an increase of 11.2% vs. the same quarter a year ago.

As a result, subprime share is 16.9% in Q3, up from 15.6% a year ago. In 2019, before the pandemic, subprime share was 20%. The New York Fed defines subprime as credit scores below 620.

Researchers for the New York Fed say auto lenders in the last several quarters tightened approvals in response to an uptick in delinquencies. Most household balance sheets remain healthy, but the credit tightening created “hardship” for some households, researchers say.

Meanwhile, dealers say they expect lower interest rates, plus higher inventory and higher incentives on new vehicles, plus a comeback in new-vehicle leasing, should eventually make used vehicles more affordable, too.

“You're seeing some more ammunition pointed at that affordability issue,” says Daryl Kenningham, president and CEO of Houston-based Group 1 Automotive, in a third-quarter earnings call.