Credit Scores Down, Subprime Lending Up

LAS VEGAS – Consumer credit scores are down and subprime auto lending is up, Experian Automotive says.

Lenders, that all but slammed the door on would-be car buyers with imperfect credit during the cold economic years of 2008 and 2009, now are putting the welcome mat out for them.

New-vehicle loans for subprime borrowers increased 22.4% in second quarter-2011, compared with year-ago, according to a credit-trend analysis by Experian, a tracker of lender and debtor activity.

During that time, 22.3% of new-vehicle loans went to customers in non-prime, subprime and deep-subprime segments.

The average customer credit score for both new- and used-vehicle loans dropped 10 and eight points, respectively. For new-vehicle loans, the average score fell from 772 to 762. Pre-owned car loans, slid from 679 to 671.

Competition this year among lenders is leading to them doing more business with the once-shunned subprime set, says John Gray, Experian Automotive’s vice president-sales.

“We are seeing a steady growth in subprime financing,” he says at the 2011 Finance and Insurance Management and Technology conference here.

Banks show the biggest appetite for lending to consumers with unimpressive credit scores, he says. “They are buying deeper to get a greater share of the market. They are offering more aggressive terms and attractive rates.”

Lenders “buying deeper,” Experian’s John Gray says.

In deciding whether to approve financing, lenders are taking a particular interest in the type of car a potential subprime borrower wants to buy, Gray tells WardsAuto.

That means an individual with a marked-down credit score probably won’t secure a loan for an expensive luxury vehicle, but stands a chance of getting financing for a lower-priced compact car.

Because financial institutions remain reasonably careful about the way they structure auto loans, Gray doesn’t foresee a surge in delinquencies and defaults stemming from the increased subprime lending.

However, he does predict an uptick of some of those loans turning bad. “We’re still not out of the economic turmoil we were in.”

Subprime borrowing is most prevalent in Michigan, Colorado, Louisiana, Ohio and Florida, Experian says. By brand, subprime-loan, new-car leaders are Chrysler, General Motors and Hyundai.

Even though Hyundai’s sales are soaring and it has expanded its lineup to include luxury cars, the brand “always has appealed to subprime consumers” interested in inexpensive, entry-level vehicles, Gray says.

Banks have increased their share of new-car subprime lending 65% and now hold 40.5% of that segment, followed by auto makers’ financing units at 35%, he says. Because of their risk-adverse charters, credit unions currently make up only 10% of the segment.

A few years ago, lenders started backing away from long-term auto financing, such as 84-month loans, on the premise they presented greater risks as time went by.

“Lenders back then were saying, ‘We don’t want to do these long-term loans anymore,’” Gray says. “But guess what? They’re back.”

Auto financing has shown stability during recent times, especially compared with the subprime-mortgage debacle of a few years ago.

Many auto lenders went through their own bloodbath in the late 1990s with big losses on bad loans. But in recent years, “auto lending has had prudent business practices,” Gray says.

Auto-loan originations are down compared with pre-recession times, when they hit $712 billion in 2007, compared with $636 billion last year.

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