Subprime auto loans are getting riskier, harder to get, says TransUnion

Auto lenders that cater to borrowers with subprime credit histories saw a sharp rise in delinquencies in the second quarter, according to credit bureau TransUnion.

Auto lenders will likely respond by making subprime auto loans harder to get, said Matt Komos, vice president, research and consulting for Chicago-based TransUnion.

“There’s less of a subprime and near-prime percentage,” in the outstanding auto loan numbers for the second quarter, he said in a phone interview.

In July 2020, subprime auto loans — defined by TransUnion as credit scores of 600 and below — accounted for 14.4% of the total, up from 15.8% a year ago, according to an Aug. 20 TransUnion report.

Analysts have said separately that high unemployment linked to the coronavirus affects lower-income households much more seriously.

Charlie Chesbrough, senior economist for Cox Automotive, said in a recent presentation that unemployment hits 40% for households with incomes under $40,000, compared to 13% for households over $100,000. “This recession is hitting the lowest incomes,” he said.

At TransUnion, Komos said the number of consumers asking about their credit scores fell in the second quarter. “Generally that means there’s a tightening,” in lenders’ loan approval standards, he said.

In the second quarter, consumer delinquencies more than 60 days past due reached 1.5% of total auto loans and leases. This is an increase of 27 basis points, or 0.27 percentage points, from the second quarter of 2019. It is also the largest year-over-year increase in 11 quarters, TransUnion said in the report.

This is the average of all car loans and leases. The number of defaults was much higher for independent finance companies, which specialize in subprime auto loans, Komos said. For independents, 60-day delinquencies accounted for 7.24% of the total, down from 4.4% a year ago, he said.

“This recent deterioration in performance, along with the economic stressors presented by the COVID-19 pandemic, has led to lender pullbacks at all risk levels, but was primarily driven by subprime and near prime” , TransUnion said in the report.