It's become harder for dealerships to place subprime auto loans with financial institutions than it was less than a year ago, a chief risk officer for a subprime lender explained at a conference last month.
However, according to an executive for a large regional buy-here-pay-here dealership group at the conference, a borrower's credit risk can be improved by:
- The type of vehicle being financed
- The speed at which equity is delivered
- The presence of a vehicle service contract
The executives participated in a subprime lending forum at the Auto Finance Summit East Conference last month. Panelists noted a drop in the percentage of credit-challenged customers receiving auto loans and leases in the first quarter, a trend that aligns with Experian data.
Experian, which classifies consumers with credit scores of 501 to 600 as subprime and scores of 300 to 500 as deep subprime, reported that subprime borrowers made up 14% of loans and leases written on new and used vehicles in the first quarter, a one-point decrease from the previous year and a four-point decrease from the first quarter of 2020. Experian further noted that first-quarter loans and leases allotted to deep subprime borrowers decreased from 2.3% to 2% year-over-year and from 4.1% in the first quarter of 2020.
According to Experian, subprime used-vehicle loans accounted for 20% of loans in the first quarter, almost a record low, down two points from last year and five points from the first quarter of 2020. The percentage of subprime loans for new vehicles decreased from 9.6% in 2020 to 5.1% in this year's first quarter.
Panelist Michael Opdahl, COO of Automotive Credit Corp. affirmed the findings, saying vehicle demand among subprime borrowers remains strong but that getting loans through has become more difficult. He said tightened lending practices and consumers' decreased creditworthiness have resulted in fewer captured borrowers over the past six months at Automotive Credit Corp.
"We're seeing some of the lowest FICO scores ... we've seen in years," Opdahl said.
Opdahl suggested that governement stimulus payments inflated consumers’ credit scores and removed negative items from their credit reports. He stressed that a borrower had to be "pretty bad" not to grow their credit score in 2021 and 2022.
However, the consumer debt-to-income ratio grew "exponentially" starting in April 2022, Opdahl added. Subprime customers were hit with inflation and with high gas prices as stimulus funding ended, pushing them to rely on credit cards to get by. Automotive Credit Corp noticed a 40-point drop in FICO scores between September 2022 and the end of last year before leveling off in the first quarter. However, Opdahl said FICO scores dipped again in April
Two-month auto loan delinquencies are also rising, especially among subprime borrowers, for whom two-month auto loan delinquencies rose to 1.69% in the first quarter, higher than the recession of the late 2000s, according to an S&P Global Mobility analysis of TransUnion data.
S&P Global reported that borrowers who took out used-car loans during the first half of 2022 had a higher likelihood of being late on payments compared to those who borrowed in the first half of recent years.
Auto Finance Summit East panelist Scott Fontaine, chief risk officer for Flagship Credit Acceptance, said inflation forced customers to choose between buying eggs and making a car payment. “They chose eggs,” he said.
Panelists recommended doing the following to make it easier for dealerships to place a loan:
- Lend to customers purchasing vehicles to operate a business, as they tend to make their payments.
- Put more money into reconditioning vehicles to avoid breakdowns early in the loan period.
- Extend credit to customers purchasing vehicles that retain their value better over time.
- Extend a 12-month service contract to avoid problems with unexpected repairs.