Published September 03, 2013
U.S. banks are making more of their car loans to subprime borrowers as delinquencies fall and as automobile manufacturers' finance subsidiaries draw the more-reliable customers, according to data released on Tuesday.
U.S. banks made 36 percent of their car loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according to data from Experian Plc, which tracks credit information as well as data on nearly 700 million vehicles in North America.
The move down the credit spectrum came as the banks faced stronger competition. Their market share fell four points to 36 percent in the past year, while so-called captive finance companies of automakers gained more than seven points to 25 percent of the market. Credit unions, the third-biggest type of auto lender, lost two points of market share to 15 percent.
The car companies' finance units also moved up the credit scale, making 74 percent of their loans to borrowers that Experian rates as prime.
The shifts came as average credit scores for new car loans from all lenders fell for the fourth consecutive year. Lending standards were tightest in 2009, when the U.S. economy was in recession and many banks and automakers were desperate to conserve capital.
Consumers are better off, too, and have reason to be more optimistic about their ability to repay. The rate of car loans delinquent 30 days fell to 2.38 percent, the lowest in any second quarter since at least 2006, Experian reported last month.
A record 84.5 percent of people acquiring cars in the second quarter financed the deals with loans or leases, Experian said on Tuesday. That is up from 79.7 percent in 2008.
"Loans have become more accessible in recent years, and we've seen a steady growth in the percentage of consumers financing their vehicles," Melinda Zabritski, Experian senior director of automotive credit, said in a statement.
"This is good news for the auto industry, but it's also good for consumers," Zabritski said.
For banks, the situation is mixed. Lower delinquency rates mean reduced costs for making loans. The rate of loans ending in repossession fell to 0.36 percent in the second quarter, a record low, according to Experian.
Customer demand for auto loans has provided banks with one of the few opportunities to increase assets since the recession.
But making loans to people with lower credit scores may mean higher costs to banks when they look to get all of their money back. The average term for new car loans in the second quarter was 65 months, one month longer than a year earlier. On nearly 20 percent of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
At the same time, the interest rates that banks expect to cover losses on bad loans are down. The average rate from all lenders on new cars was 4.46 percent in the quarter, down from 4.63 percent a year earlier, according to Experian. For used cars, the average rate fell to 8.56 percent from 8.95 percent.
Despite the lower rates, monthly payments for borrowers have not declined in the past year because they took out bigger loans. For new cars, the average monthly payment was $457, up $5, and the average amount financed rose by $812 to $26,526.
Total U.S. outstanding auto loans rose to nearly $751 billion, up 10 percent from a year earlier.
(Reporting by David Henry in New York; Editing by Lisa Von Ahn)