Is the Subprime Auto Market Creating a Bubble?
According to our Equifax Economic Trends Commentary, subprime auto lending is not creating “the next bubble,” as some have speculated. The detailed Trends Commentary examines data aggregated from the credit reports of more than 210 million consumers in the Equifax credit database. This analysis evaluates the current subprime auto market and its potential economic benefits, and a careful review of the data fails to show any evidence of a bubble.
Back to the good old days
The lending landscape today is not the same as it was in 2007 — both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased. Like auto sales, the number of loans has been rising annually since 2009. What’s more, the percentage of loans going to subprime borrowers (scoring below 640) has held steady for the last three years. In addition, the number of subprime loans made to borrowers with risk scores exceeding 600 has risen by nearly 24 percent since 2006, and has jumped 3.1 percent since 2011. This underscores a relative tightening of standards in the subprime auto market. The fact is, current subprime loans have been performing well since the start of 2014.
Average loan balance up
While the average loan balance for subprime credit score borrowers has been rising, analysis shows that the average loan amount generally rises with a borrower’s Equifax Risk Score. Instead of granting larger loans to the full spectrum of subprime borrowers, lenders have been keeping loan sizes the same — based on credit scores — while making more loans to borrowers whose credit scores show less risk. Loan sizes have become larger due to fewer high-risk borrowers receiving those smaller loan amounts today.
Loan performance up
The traditional signposts of a subprime bubble — downgrades in loan performance, higher delinquency rates and increased charge-offs — are simply not evident. In fact, loans originated in 2010 and 2011 have enjoyed robust performance, partly because they originated during years of restrictive lending mandates. What’s more, 2014 vintage loans are experiencing very low early write-off rates compared to recent years for the same age.
Is subprime auto lending creating the next bubble? An analysis of the data fails to support this, showing instead that subprime auto lending is quite healthy.
To learn more about Equifax solutions for Automotive, please visit our website.
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