On the Rise: Subprime Car Loans

Loosening lending standards – cause for alarm?

Car Loans

car loanSubprime lending was the bane of the housing market, attracting and pulling in millions of home buyers who otherwise would not have been approved for a loan. These types of loans ended up being a huge problem as such homeowners were unable to handle the higher monthly costs incurred as little to no money was needed for a down payment. Well before the housing market collapsed, these owners were unable to keep up with payments and began to default on their loans.[1]

Subprime Lending

The auto lending industry has its own experience with subprime lending although there are some differences in the way that these loans are written and handled. Subprime lending targets people with poor credit, borrowers who otherwise would not be able to afford a new car loan as offered by the lending arms associated with each manufacturer such as Toyota Credit or TD Auto Finance. Such borrowers typically have a credit score under 620, but the approval rate was as low as 9 percent as recently as 2010.[2]

The trend today, however, is to focus on subprime borrowers with Experian Automotive reporting that the “portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter” of 2011, up from 37.2 percent a year earlier.[3] Lending standards are loosening although unemployment remains above 9 percent and the U.S. economy appears to be weakening.

Conservative Lending

Although the portion of subprime lending is on the rise, lending standards are still tighter than what they were a few years ago. Conservative lending practices employed in 2009 and 2010 has helped the lending industry to rebalance its portfolios and carefully extend lending to people with less than stellar credit. The industry reports that delinquencies are low and repossessions have also declined, but these numbers may change as the subprime lending market continues to expand.

New car loans rates are below 4 percent for buyers with excellent credit. Zero percent financing and other low-rate financing deals are being marketed right now, but those rates are reserved for people with excellent credit which usually means a credit score above 740.

Cautionary Borrowing

For people with poor credit, subprime loans may be the only way to new car ownership. If you’re in the market to buy, however, consider whether you can weather a change to your personal economic climate (as in a loss of income) before being enticed to buy a vehicle you really cannot afford. Otherwise, a late model used car might be a better option provided the loan rate terms are in the single digits and loan terms are 48 months or less.


[1] Federal Reserve Bank of St. Louis Review; The Evolution of the Subprime Mortgage Market; Souphala Chomsisengphet and Anthony Pennington-Cross; January/February 2006

[2] Idaho; (Michigan) GM Takes On Subprime Car Loans, But It’s Less Risky; July 26, 2010

[3] Reuters: U.S. Lenders Making More Subprime Car Loans: Report; August 30, 2011

See AlsoTransUnion: Longer Term Auto Loans Increase Odds of Default

Author: Matthew Keegan
Matt Keegan has maintained his love for cars ever since his father taught him kicking tires can be one way to uncover a problem with a vehicle’s suspension system. He since moved on to learn a few things about coefficient of drag, G-forces, toe-heel shifting, and how to work the crazy infotainment system in some random weekly driver. Matt is a member of the Washington Automotive Press Association and is a contributor to various print and online media sources.

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