Nov 17, 2013 Philip Burgess
Subprime loan activity has been increasing in the American auto finance sector. Although some lenders may be cautious of this type of credit extension, many experts believe subprime lending in the current market is not as risky as some believe. Even borrowers with poor consumer credit reports are finding that it's becoming easier to successfully apply for car loans at the moment.
According to Bloomberg News, l large number of auto dealers are becoming more comfortable with the concept of subprime sales because the national economic outlook is improving. Also, unlike subprime home loans, many individuals who use subprime auto financing rely on their vehicles to drive to and from work, meaning they prioritize payments on car loans over other expenses.
The trend has been so significant that subprime buyers now account for more than a quarter of all new car sales in the United States, according to Experian data cited by Bloomberg. In 2009, just 18 percent of the market compromised of subprime activity.
One of the reasons lenders are willing to offer such loans is because interest rates remain low. Because this has resulted in lower monthly premiums, the delinquency rate has dropped on auto loans across the country. This means that lenders see fewer defaulted loans than they did during the Great Recession. As a result, extending supposedly risky subprime products is extremely viable.
Easy access to credit
In a recent segment for NPR and WBUR Boston, Marty Schenker of Bloomberg told the outlet that consumers have a relatively easy time applying for subprime loans. When asked about the subject, he said that most dealers simply want proof of employment, as many believe the economy is improving and the unemployment rate is low enough to ensure subprime credit is less than risky than in years past.
"Well, in the examples that we discovered during our reporting, I mean, all they, really, are asking for is a couple of pay stubs, proof of - that you're actually employed, and off you go," Schenker said of the subprime loan process.
Although the subprime market is picking up steam, lenders would still be wise to ensure they are mitigating as much risk as possible. There are some financial organizations that offer services to lenders that help them reduce the risk associated with subprime credit extension. Using such offerings will allow auto lenders to take advantage of the growing subprime market.