Subprime Loans are Coming Back Strong

by Jon LeSage, Edi­tor of Used Car Mar­ket Reports

Avail­abil­i­ty of cred­it for new and used car buy­ers is at the heart of strong sales gains being made – includ­ing loans to buy­ers with sub­prime cred­it scores, usu­al­ly below a 640 cred­it score. Also grow­ing is deep sub­prime lend­ing, in which cred­it scores are gen­er­al­ly below 550.

Sub­prime loans dried up after the reces­sion and have been com­ing back strong – and used vehi­cles is where those buy­ers are going, accord­ing to a USA Today fea­ture.

Sub­prime car shop­pers are choos­ing used cars over new cars by an almost 2-to-1 mar­gin, accord­ing to Exper­ian Auto­mo­tive. Deal­ers say this is because used cars gen­er­al­ly are less expen­sive and car­ry low­er pay­ments now that used vehi­cle val­ues are typ­i­cal­ly drop­ping below new car prices.

In Q1 of this year, 63.2% of loans were for used cars, and the aver­age loan amount was $17,532, Exper­ian said. For new cars sold dur­ing that time peri­od, the aver­age loan was for $26,648.

One of the chal­lenges for deal­ers dur­ing this fund­ing trend has been vehi­cle repos­ses­sions. In Q1 of 2013, repos­ses­sion were up about 17% over the same peri­od last year, Exper­ian Auto­mo­tive said.

Cred­it scores are not the only thing to look at bet­ter man­age risk – a customer’s car cred­it his­to­ry is a very good place to start. One to look for peo­ple who might have had a mort­gage prob­lem dur­ing the reces­sion. Oth­er fac­tors being looked at include employ­ment sta­bil­i­ty, debt-to-income ratios, and the amount that should be set for the down pay­ment.

Lenders are doing bet­ter with sub­prime loans today than they were five years ago. There are more lenders on the mar­ket, which helps the mar­ket stay com­pet­i­tive. Lenders have more con­fi­dence and are will­ing to change their meth­ods, includ­ing tak­ing trade-ins as part of the loan pack­age.


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