More subprime lending in automotive financing

Many economic improvements over the past year or more have been encouraging for lenders and consumers alike, and that was reflected once again in changes seen in the auto loan industry over the course of the third quarter of 2012.

Consumers with credit scores ranging from nonprime, subprime, and even deep prime had an easier time obtaining car loan financing between July and September than in the same three-month period in 2011, according to the latest quarterly State of the Automotive Finance Market issued by Experian Automotive.. In all, the share of new auto loans extended to borrowers with moderately or severely damaged credit ratings rose 13 percent on a year-over-year basis, rising to 24.84 percent of the market from the 21.87 percent observed 12 months earlier.

Similarly, there was a 5.47 percent increase on an annual basis in nonprime used auto lending, the report said. This type of lending comprised 54.43 percent of the market, up from the 51.6 percent seen the year prior. Consumers also relied more heavily on leasing between July and September.

Inside the numbers
Despite the improvements in the number of auto loans extended to consumers who have low credit ratings, lenders are still somewhat more reticent to grant credit to these borrowers than they were prior to the onset of the recession, the report said. Through the end of the third quarter, the average credit score needed to secure financing for new cars was 755, up slightly from the 749 during the same period in 2007.

However, the 755 observed last quarter was also down eight points from the 763 seen in the third quarter last year, so it seems as though lenders are slackening requirements considerably to accommodate consumers’ improving personal finances, even if their credit scores aren’t getting better at the same rate, the report said. This was similarly reflected in used car financing, for which the average credit rating needed to obtain a loan slipped to 668, from the 676 seen in the same quarter last year.

“With leasing showing a continued upward trend, and lenders increasing their appetite for risk, consumers were in a good position to obtain a vehicle during Q3,” said Melinda Zabritski, director of automotive credit at Experian Automotive. “Expanding loans to lower-risk tiers opens the market for more car shoppers, while an increase in leasing means it is easier for consumers to get more vehicle for a lower monthly payment. Both of these trends are positive signs of a strong and recovering auto finance market, which ultimately benefits the consumer and the entire auto industry.”

Where financing comes from
When it comes to actually obtaining the financing needed to purchase a new or used car, borrowers still largely turned to banks, though the rate declined, the report said. Bank-issued auto loans accounted for 40.98 percent of the market, but that was down 2.9 percent on a year-over-year basis. Meanwhile, credit unions picked up some significant slack, with their share growing 4.5 percent to 18.22 percent of all such loans issued nationwide. Finance companies made up another 13.29 percent.

And where the size of these loans is concerned, there was a slight uptick in both new and used auto financing, the report said. The average new vehicle loan totaled $25,963 in the third quarter, up from $25,873 on an annual basis. Similarly, used car loans grew to an average of $17,577 from $17,359.

Delinquency still in decline
Even as consumers are borrowing more and gaining access to greater loan availability, the rate at which borrowers fell behind on their payments continued to fall, the report said. In all, instances of payments 30 days or more behind slipped to 2.67 percent of all auto loans between July and September, the second consecutive third quarter in which these early-stage delinquencies were below pre-recession levels. The same is true for 60-day delinquencies, which dropped to 0.69 percent from 0.71 percent.

Late payments can serve to severely damage a borrower’s credit rating, as this factor alone makes up 35 percent of their score. It is therefore important for consumers to make sure they’re able to make all payments on time and in full. However, another potential problem they may encounter when dealing with their credit is that their credit reports may have unfair markings on it, which can likewise mar their ratings. As such, borrowers should take the time to order copies of these documents and check them over closely. If they discover any such entries, it can be prudent to work with a credit repair company, which may be able to help get these markings cleared up, and restore a consumer’s credit to where it should be.

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