Fewer lenders are extending car loans to consumers with poor credit histories, reversing a trend that had triggered alarm of a new financial bubble, Moody’s Investors Service reports.
As Americans have traded in aging vehicles, private-equity firms have regained an appetite for securities consisting of car loans due to cash flow and minimal risk. More lenders targeted buyers with low credit scores, charging them double-digit interest; but they are now starting to pull back from subprime customers. The average credit score in this borrower class has risen slightly in the last two quarters. They peaked in 2010, falling to 646 in the fourth quarter of 2013. Moody's analysts also note that the rate of late payments on subprime car loans may be on the rise, but they are still below the levels seen at the height of the financial crisis.
Investigations into the subprime underwriting standards and securitization at large lenders have raised concern that investor demand is prompting lenders to relax their standards too much, which could cause them major losses similar to the problems with subprime mortgages. Housing finance, however, is much larger than the auto lending market; and cars are much easier to repossess and sell than homes, which may limit the damage subprime auto loans could do to the economy.