Subprime Auto Lending Growing Once Again

Subprime lending is becoming popular once again, even though lenders are still staying away from subprime mortgages, which is the one of the triggers of the nation’s housing breakdown.

There has been an increase in subprime credit cards and auto loans and a few bank risk managers expect increases in the existing $600 billion US auto loan market.

Based on a recent survey of risk managers at banks and other financial institutions published in the previous week, although only 25 percent of risk managers expect a 25 percent increase in the subprime lending during the next six months, one half of those who expect an increase believe that it would fall on auto loans.

FICO, the credit analytics firm, together with Professional Risk Managers’ International Association, conducts a survey of risk managers every three months regarding their prospects for the coming six months. However, this was the first time the subprime lending was included in the questions.

In general, subprime loans are intended for borrowers with credit scores less than 680. Based on the data of Experian, 44 percent of all US auto loans in quarter one were given to borrowers with scores less than 680, which is an increase from 42 percent in the previous year.

Subprime auto loans that were packaged and sold to investors in the secondary market did favorably. Even though subprime loans are smaller than mortgages, cars are frequently considered as important to households. In fact, Andrew Jennings, chief analytics officer at Fair Isaac Corp., said that the public is struggling to pay back their auto loans more than they do in paying back their mortgages.

The increase in the subprime auto lending has been a surprise to Guy Cecala, publisher of Inside Mortgage Finance. Cecala believes that it was brought about by securitization. People have higher security about subprime auto loans compared to subprime mortgages.

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