Stimulus checks should help, but subprime auto loans are at record highs

According to the latest statistics from Experian Automotive, the recovery in US auto sales is leaving borrowers with subprime loans behind.

It’s no surprise that borrowers with subprime loans are moving out of the new-vehicle segment, where subprime loans don’t typically make up a large share, even in good times.

But even looking exclusively at used-vehicle loans, the share of borrowers with subprime credit is at an all-time high, according to Melinda Zabritski, senior director of automotive financial solutions for Experian Automotive, in a phone interview.

Experian defines subprime as credit scores below 600. That share fell to an all-time high of 24.4% of used vehicle loans in the fourth quarter of 2020, from 28.3% a year ago, a told the credit bureau.

And for the first time on record, borrowers in the riskiest category of “deep” subprime – defined by Experian as credit scores of 500 and below – accounted for less than 2% of total loans and leases, new vehicles and used vehicles, for the fourth quarter of 2020.

The share of deep subprime was 1.9% of this total, compared to 3.4% a year ago. Experian released fourth quarter statistics on March 4.

In 2021, tax refunds and government stimulus checks should help. Historically, the first quarter is usually as good as it gets for subprime auto loans, thanks to tax refund season.

But auto lenders and analysts are starting to worry about what will happen to subprime auto loans later this year when that temporary effect passes.

Mahesh Aditya, CEO of subprime auto loan specialist Santander Consumer USA, told the American Financial Services Association’s recent vehicle finance conference that credit quality in 2020 was better than expected given high unemployment. . That is, metrics like chargebacks were lower than expected.

He said consumers in 2020 clearly place a higher priority on paying for their car, more than credit cards, for example.

“The other weird thing that’s happened during the pandemic is that we’ve been able to improve credit quality at all levels – prime, subprime, at all levels – we’ve found credit quality that means more customers creditworthy, higher FICOs, throughout the pandemic,” he said at the conference, which was held online. FICO stands for Fair, Isaac Co., a commonly used credit score mark.

“These are trends that we will be watching very closely next year once the stimulus package runs out,” Aditya said. “The other thing, of course, is how much of that is related to the stimulus and how much of it isn’t. That’s the big question.