Expert: Subprime lending to change the auto finance sector

Due to the improving economy during the last year, lending outlets have been able to loosen their credit standards that were tightened as loan providers struggled in the midst of the Great Recession. One development that has emerged as the result of a healthy economy is an increase in subprime auto lending.

With consumer credit reports starting to showcase better rates overall, major banks and other financial institutions are more willing to make riskier credit extensions. Because individuals with solid credit scores that have improved in recent months are able to stay on top of loan payments, lenders are justified in increasing their subprime activity.

In fact, Arjan Schütte of Forbes indicated that the subprime auto lending market is quickly becoming a major source of credit growth. The 80 million Americans Schütte noted are underbanked spend $80 billion in financial service fees each year, most of which goes to auto financing firms.

Benefits of subprime lending
On the surface, the subprime lending spike appears to be a negative development, but Schütte argued that this trend might actually be positive. He noted that he plans to outline how the sector is turning into a short term lending modeled industry, something he says is a good thing. Also, he believes that standard auto lending activities will be vastly different in five years because of the boom in subprime credit.

One way the industry may benefit borrowers is that there is intense competition for subprime markets. Unlike most other multi-billion dollar industries, no subprime auto lender controls more than 6 percent of the market, according to Schütte. Potentially, this could result in more consumer-friendly services and interest rates in the future as the subprime sector grows and lenders compete for these customers.

Another reason industry leaders are optimistic about the future of the subprime market is because Americans are starting to show that they are becoming more financially responsible. Wealth Daily reported that despite the increase in subprime loans, data from Experian suggests auto loan delinquencies are on the decline. The source noted that the late payment rate for auto loans in the second quarter was 2.38 percent, the lowest second quarter market recorded since 2006.

This may highlight that lenders are ready to participate in subprime credit activity because they have noticed a shift in consumer spending and financial monitoring habits. If the subprime market remains strong, it will help lenders and a large portion of underbanked Americans looking to make major purchases.