Subprime auto loans may be harder for dealerships to place with lenders

Subprime auto loans may be harder for dealerships to place with lenders

According to Experian, subprime borrowers were involved in 14 percent of loans and leases written on new and used vehicles in the first quarter of 2023, down 1 point from a year earlier and 4 points from the largely COVID-unaffected first quarter of 2020. Deep subprime borrowers received 2 percent of first-quarter loans and leases, down from 2.3 percent a year earlier and 4.1 percent in the first quarter of 2020. Experian classifies credit scores of 501 to 600 as subprime and scores of 300 to 500 as deep subprime.

Experian said the proportion of subprime used-vehicle loans reached “near record lows” for the first quarter, with subprime debt making up 20 percent of them, down 2 points from 2022 and 5 points from the first quarter of 2020. New-vehicle subprime loans in the first quarter fell to 5.1 percent, down from 9.6 percent in 2020 and 5.4 percent in 2022.

Panelist Michael Opdahl, COO for Automotive Credit Corp., said demand for vehicles remains but the market has become more difficult for subprime borrowers. Automotive Credit captured fewer borrowers over the previous six months because of its own tightening and consumers’ reduced creditworthiness, he said,

“What we’re seeing now is some of the lowest FICO scores … we’ve seen in years,” Opdahl said. Consumers who might have qualified for loans in the past are “not even close,” he added.

Jennifer Parsons, senior director of finance at Walser Automotive Group in Minnesota, said subprime deals aren’t as common in her state, where residents tend to have higher credit scores. For the subprime deals her group does handle, no significant change in lender behavior was noted, she said.

“It doesn’t feel like subprime is any harder to get done right now than it used to be,” Parsons said.

Yet this sentiment might just reflect higher vehicle prices making subprime loans more challenging the past few years, she added. “Maybe I’m just used to it being a little tougher.”

Walser Automotive, of Edina, Minn., ranks No. 28 on Automotive News‘ list of the top 150 dealership groups based in the U.S., with retail sales of 23,346 new vehicles in 2022.

Opdahl said that during the pandemic, consumers experienced credit “score inflation” from “stimmy funds” and the removal of certain items from their credit reports. A borrower had to be “pretty bad” not to grow their credit score in 2021 and 2022, he said.

Automotive Credit saw the consumer debt-to-income ratio grow “exponentially” starting in April 2022, Opdahl said. Subprime customers ceased receiving stimulus funds and were “getting punched in the stomach” with factors such as inflation and gas prices. They began to rely on their credit cards to make do, he said.

The company observed FICO scores fall 40 points between September and the end of 2022. “Thankfully,” they leveled off in the first quarter, Opdahl said, before dipping again in April.

Subprime borrowers are the reason two-month auto loan delinquencies rose from 1.43 percent in the first quarter of 2022 to 1.69 percent in the first quarter of this year — higher than in the recession of the late 2000s, according to an S&P Global Mobility analysis of TransUnion data.

The data indicates borrowers who took out used-car loans in the first half of 2022 were more likely to be late on their payments than used-car buyers who borrowed in the first six months of other recent years, S&P Global said. But lenders took action to address the issue, and consumers who borrowed in the second half of 2022 made their payments with a similar consistency as their peers in other years, it added.

Auto Finance Summit East panelist Scott Fontaine, chief risk officer for Flagship Credit Acceptance, said the lender’s internal models did not anticipate inflation, and focused instead on unemployment. Consequently, Flagship found its portfolio of loans performing worse than expected, with delinquencies rising almost in lockstep with inflation increases. Fontaine said inflation forced customers to choose between buying eggs and making a car payment.

“They chose eggs,” he said.

Opdahl said Automotive Credit was also caught off-guard. It, too, failed to account for inflation. In the second quarter of 2022, “we really locked things down” after noticing a delinquency trend, he said.

Flagship toughened its underwriting in 2022 as well, according to Fontaine.

Powers said that vehicle prices and interest rates are pushing special finance customers out of the market.

“You used to be able to buy a car if you made $15 an hour,” the “special finance guru” for Oakes Kia said. With that income today, “it can be very difficult to find a car that a bank will approve you on.”

Placing a subprime deal is likely harder for a dealership today than it was nine months ago, Fontaine said.

Dealerships tend to know their partner lenders’ parameters, but data indicates some are having to “shotgun” credit applications in hopes of finding someone to accept a loan. Auto lenders should communicate their programs to dealerships so retailers know which deals are a good fit, Fontaine said.

Opdahl agreed, encouraging dealerships to develop close relationships with four or five key subprime lenders. The number of inquiries his company has received from dealerships nationwide represent a “red flag” indicating that multiple dealers might have lost a subprime lender and are hunting an alternative, he said.

By failing to recognize that “this might be the new reality,” dealers are not really helping themselves, Opdahl said, as a $25,000 vehicle that any lender would likely have financed a year ago might find few takers today.

Panelists also touched on strategies that exist for dealerships seeking to assemble deals more favorable to subprime consumers and partner lenders willing to underwrite their debt.

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