Latest report from Equifax shows the growth in auto loans for credit challenged borrowers may have leveled off but average loan amounts are increasing

Understanding Auto Credit

There was some good news for car buyers with bad credit earlier this week as Equifax released its latest National Credit Trends Report on October 6th. The reason we're discussing the report is we feel it's important that people who are considering applying for a car loan with bad credit understand the overall lending environment before submitting an application.

No Subprime Auto Loan Bubble

For weeks now, we've read conflicting opinion over the state of subprime auto lending and the possibility of a bubble similar to the previous housing bubble. Recently, Amy Crews Cutts of Equifax weighed in on the state of subprime with the following:

"Auto sales continue to soar, crossing the 17.4 million mark on an annualized basis for new cars and light trucks in August," said Amy Crews Cutts, Senior Vice President and Chief Economist at Equifax. "The abundance of high-quality vehicles for sale, the attractive financing options available, and the ever-increasing age of cars on the road today have created an environment that makes it easy for consumers to say 'yes' when it comes to purchasing a new or used car. Importantly, auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space."

Subprime Auto Loans

A portion of the report touched specifically on higher-risk auto loans, stating that:

  • The total number of new loans originated year-to-date through June for subprime borrowers, defined as consumers with Equifax Risk Scores of 640 or lower, is 3.9 million, representing 31.2% of all auto loans originated this year. This is a slight decrease in share from this same time in 2013.
  • Similarly, the total balance of newly originated subprime auto loans is $70.7 billion, an eight-year high and representing 27.8% of the total balance of new auto loans, a slight increase in share from the previous year.
  • Year-to-date in June, the average loan amount for borrowers with risk scores of 680 or lower are increasing the most, showing a 3% increase from the previous year. Loan sizes among borrowers with risk scores of 760 or higher show little change from the same time a year ago

It's worth noting that the number of new subprime car loans decreased during the first half of 2014 when compared to 2013. It's also noteworthy that the average loan amount for credit-challenged borrowers is on the rise.

Both of these developments could affect buyers with credit issues because:

  1. With the strong demand for both new and used cars continuing and with the number of new loans to problem credit buyers decreasing, lenders can afford to be even more selective in approving applications.
  2. With average loan amounts rising, credit-challenged buyers will need to choose between higher monthly payments or longer loan terms - either making it more difficult to make their monthly payments or, worse still, with longer terms making it harder to trade out of their car earlier and into another vehicle with a lower interest rate loan.

The Bottom Line

The latest credit trends are a mixed bag for borrowers looking to get prequalifed for bad credit financing. On one hand, lenders continue to work with credit-challenged borrowers. On the other hand, average loan amounts are lenders are providing is escalating, which translates to an increase in the average interest expense of these loans - something that should be avoided.

We'd also like consumers with credit issues to keep in mind that Auto Credit Express can match them up with those car dealers that can offer them their best opportunities for auto loan approvals.

So if you are ready to reestablish your credit, you can begin now by filling out our online car loan application.