ATLANTA (8/26/14)--A fair and functioning subprime auto lending market is an essential element of a healthy economy, according to a new white paper from Equifax.
Subprime auto lending does have its critics. Some subprime lenders have been criticized for granting loans with terms unfavorable to borrowers, similar to the mortgage issues that precipitated the financial crisis. Others say subprime auto lending could create a bubble similar to the one that precipitated the recent recession.
But "second chance" auto loans help people obtain access to convenient transportation, which makes them more employable and offers them more opportunities for education and community involvement, according to the Equifax white paper, "Not Yesterday's Subprime Auto Loan."
In a well-regulated financial market, rates are typically driven by competitive pressures, and predatory or discriminatory behaviors are prohibited by law, the white paper said. Borrowers who have credit scores in the subprime range have proven over time to have higher incidences of default on future obligations and thus are usually offered credit at higher interest rates than those with prime-grade credit scores.
Regarding a potential subprime auto lending bubble, Equifax studied data aggregated from the credit reports of more than 210 million consumers in its credit repository. The evaluated data indicates that subprime lending in the auto sector has been fairly stable since 2012; that originations have been shifting toward the higher end of the subprime spectrum; and that recent subprime loans have been performing well.
"Furthermore, the lending landscape today is not the same as it was in 2007," the paper said. "Lending in the heyday of the credit boom often greatly underweighted any consideration of credit worthiness outside of a credit score."
The paper explains that lending has returned to the "good old days," both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased. In the subprime auto lending area, lenders are much more likely to verify incomes. "Given this, loans originated with a 620 credit score today are likely to perform very differently from loans originated with a 620 credit score in 2007, when the loans were likely granted without full underwriting," the paper said.
Fourteen credit unions located throughout the country participate in Non-Prime Auto Loans, a partnership between the National Credit Union Foundation and the Filene Research Institute that tests the viability of subprime auto lending in credit unions (News Now July 28). Through the program, credit unions make loan decisions that focus on the member's overall relationship with credit union.