Although many asset managers said during the financial crisis that they would never touch subprime again, subprime lending has made a return in auto lending. Data show that outstanding car loans rose 25 percent in the past three years, and car loans continue to rise even as outstanding loans on credit cards hover near 10-year lows. Moreover, subprime loans now represent about a third of all new car loans, up from nearly one-tenth five years ago, and one-tenth of new loans are "deep subprime," given to consumers who previously would have had little chance of getting financed.
Observers attribute the return of subprime lending in the auto industry to asset managers desperate to generate returns in the ultra-low interest rate environment and the fact that investors are snapping up bonds backed by car loans because they outperformed mortgages during the last credit crisis. Although default rates on car loans hover around a historical low of 1 percent, rising interest rates amid income stagnation could cause default rates to rise. Observers say worries among credit rating agencies and Wall Street players may be premature, and if there is a crunch in subprime car financing, they do not anticipate much systemic impact.