After the Crunch: A Look at Subprime's Recovery

The subprime market is coming back. Dealerships are finding credit more available this year than during the credit crunch in late 2008 and early 2009. Subprime loans accounted for 40.8 percent of all auto financing in the second quarter of this year, the most growing sector being consumers with credit scores of 550 to 619, according to Experian. However, the current subprime rate, while up from the second-quarter low of 37.2 percent in 2010, is still far below the peak of 46.2 percent in the second quarter of 2007. Several changes have occurred in subprime auto finance since the credit crunch, particularly with regard to the players in the market and the terms of the loans available. Credit is much more available now for subprime customers than right after the crunch as banks consider customers with lower credit scores. The range of subprime buyers’ credit scores has also risen, with most lenders now defining subprime borrowers as those below 620 and labeling customers between 620 and 679, who were traditionally nonprime, as “near prime.” Lenders have also become more cautious and are not advancing as much over vehicle value. They are also more flexible; many lenders are willing to consider individual applicants who might not seem like good candidates at first and also are being less automated when evaluating credit applications. Other changes include captives offering a range of subprime to build brand loyalty and lenders increasing loan terms to make payments lower. According to Melinda Zabritski at Experian Automotive, advances are also more well-managed by the industry so they are not creating a new crop of customers who owe more on their vehicles than the vehicles are worth. Delinquencies and repossessions are also at near-record lows due to lenders doing a good job of vetting the loans they’ve put on the books and the good performance of those loans. Even with the gains in the subprime market, lenders still remain cautious because while there are plenty of subprime customers, whether they will have the confidence to buy a car in this economy is still unclear.

Automotive News (09/12/11) Mooney, Joan