NEW YORK (10/27/14)--Delinquencies on auto loans to subprime borrowers, or those considered by lenders to be the greatest risk, have risen substantially, according to recent report (Bloomberg.com Oct. 22).
Climbing 15% in the 12 months ending in August, the delinquency rate for subprime auto loans has increased to 3.8%, according to Citigroup Inc.--nearly 3.5% higher than the delinquency rate for borrowers with good credit.
Subprime auto loan payments more than 60 days late averaged 3.3% for the year ending in August, according to the report, leading some to wonder whether an auto-loan bubble is forming, similar to the housing bubble that sent the market into a recession in 2008.
The number of auto loans made to borrowers with credit scores beneath 660 has nearly doubled since the recession, according to the Federal Reserve Bank of New York (USA Today Sept. 27).
And the same themes seen leading up to the fall of the housing market may again be rearing their heads.
Not all subprime auto loans are inappropriate, Lawrence White, economics professor at New York University, told USA Today, but lenders should not be saddling borrowers with loans they can't afford.
Finance companies also appear to be loosening credit standards as more competition has entered the auto-financing market according to Bloomberg.
Average credit scores have dropped, loan terms have been stretched to record levels and down payments have dwindled, analysts at Moody's said.
But there also has been more scrutiny from regulators, as General Motor Co.'s finance division in August disclosed that the Justice Department had launched a number of probes into its underwriting criteria, originations, warranties and securitizations dating back to 2007, according to Bloomberg.