Subprime Auto Lenders See Resurgence Thanks to Better Data
When the financial crisis hit the United States in 2008, lenders tightened up standards for all loans — including car loans. This was bad news for borrowers with weak credit, especially those in the subprime market (borrowers with a credit score of 660 or lower). However, the subprime auto loan market is experiencing a resurgence as lenders take advantage of higher-quality data.
Recent trends in subprime auto loans
After plunging in 2008, the subprime auto loan market has steadily improved. The number of issued loans has increased each year for the past five years. In 2013, there were 7.3 million new subprime loan contracts created — the first time this market passed 7 million since 2007.
Subprime auto lenders are also lending more money per contract. Five years ago, the cap on these loans was $14,753. At the end of 2013, the cap on these loans was $18,120. Lenders are more willing to enter this market because they see a financial opportunity and also believe they can minimize their losses based off of suggestive data.
The financial benefit of subprime auto loans
New lenders and private equity firms are entering the subprime auto loan market because they see a financial opportunity. Since subprime borrowers pay a higher interest rate than other borrowers, lenders can make more money on subprime loans. “When private equity funds decide to invest in auto, it’s always in subprime auto because they’re chasing the highest yields,” says Lou Loquasto, Equifax’s Auto Finance Vertical Leader.
Of course, this return depends on the borrowers actually paying their car loans back. This is where more comprehensive data is helping out.
How better data helps subprime auto lenders
Subprime auto lenders are looking at a lot more data when they make decisions than they did before the crash. “What’s happening in the subprime market is the lenders are being more sophisticated and precise as to what subprime borrowers they make loans to,” says Loquasto.
Rather than just relying on a raw credit score, lenders now also consider robust income data and employment data. They also check whether applicants are paying all of their other bills in a timely manner. By using the wide range of background checks available from qualified firms like Equifax, subprime auto lenders can narrow in on the best candidates for loans.
The future of the subprime auto loan market looks strong. Loquasto believes we should eventually get back to peak lending levels as seen in 2006, thanks to better data. This ever-strengthening market is good news for both subprime borrowers and lenders.
Image source: Equifax
Recommended For You
In reality, auto lending is different from other types of lending. Unlike most other direct to consumer relationships you have, […]
John Giamalvo, Vice President of Dealer Services at Equifax, was recently interviewed by Car Biz Today (CBT) about the year ahead […]
Last week, our auto experts headed to New Orleans, LA for two large shows –the American Financial Services Association (AFSA) […]
Today, Equifax announced availability of PowerLead Offer™, a newly introduced soft-pull credit-based solution, specifically designed for the dealership service lane […]