Borrowers with subprime credit are pinched in the current auto finance market, with the average amount borrowed and the average monthly payment up disproportionately on subprime loans and used vehicles, compared with prime-risk borrowers and new vehicles.
A shortage of computer chips is a major factor in low inventories of new vehicles, and that’s driven up new-vehicle prices. Plus, there is a follow-on effect on used cars because dealers take fewer trades. Lower new-vehicle production also means fewer nearly new used cars. Lenders can afford to be choosy, and they are choosing to avoid risk.
Melinda Zabritski, senior director-Automotive Financial Solutions for Experian Automotive, says subprime share hit a record low in Experian’s State of the Automotive Finance Market report for first-quarter 2022.
For auto loans originated in the first quarter, loans in the subprime and “deep” subprime categories fell to a combined share of 17.1%, down from 18.5% a year ago and 23.7% in 2019, pre-COVID. Experian defines those loans as having credit scores of 600 or below.
Zabritski (pictured, left) says loan-to-value ratios rose for new-vehicle loans but decreased for used-vehicle loans. Loan-to-value compares the amount borrowed to the value of the vehicle.
A loan-to-value, usually abbreviated LTV, of greater than 100% means the lender loans more than the price of the vehicle. That’s often the case when customers borrow an additional amount to pay off the remaining loan on their trade-ins.
On new-vehicle loans in the first quarter, the average LTV was 116.7%, up from 110.2% a year ago. On used vehicles, average LTV for the quarter was 114%, down from 121.9% a year ago.
“While we’ve seen LTVs for new-vehicle loans increase year-over-year, we’ve seen the exact opposite on the used-vehicle market,” Zabritski says in an email. For used-vehicle loans, she says LTVs fall in all risk categories, not just subprime and deep-subprime.
Amounts borrowed and monthly payments are up sharply. The average new-vehicle loan amount was $39,540 in the first quarter, up almost 12% vs. a year ago, Experian says. The average used-vehicle loan was $27,945, an increase of about 25% vs. a year ago.
The average new-vehicle monthly payment increased 12.3% to $648. The average used-vehicle loan increased 21.5%, to $503. Zabritski says that’s the first time the average used-vehicle loan payment has exceeded $500 for the quarter.
One upshot is a slight increase in delinquencies, although delinquencies remain at low levels in historical terms, Experian says. Auto loans 30 or more days delinquent accounted for about 1.6% of loans in the first quarter. That’s up from about 1.5% a year ago but down compared with about 1.9% in 2019.
