Analysts and company executives say the question in the subprime sector today is more "willingness" than "ability" for both lenders and consumers.
Lenders are more financially able to extend loans, and most consumers haven't seen their credit scores suffer - although there are exceptions, especially those who have lost their jobs in the recession or who have lost their homes through foreclosure.
But lenders can be reluctant to extend credit to subprime borrowers, and consumers can resist accepting stiffer terms.
"The market really has improved. The securitization market is back. It's open. It's tremendously better," says Tom Webb, chief economist for Manheim Consulting. "Having said that, selling the subprime customer, you've still got to sell the deal. You've got to get more upfront money; there's no question about that. The demand is there, but it's not going to go back to where it was."
Nervous about newbiesEven if automotive subprime lending doesn't get back to where it was when credit was looser - when lenders would lend more than the value of the car - the fundamentals have improved so much that Kyle Birch of AmeriCredit Corp. says he has begun to worry that market conditions could attract startups in subprime.
Birch is executive vice president for dealer services at AmeriCredit, a leading subprime auto lender in Fort Worth, Texas. "As capital becomes more accessible and more reasonable, there's a high likelihood there could be a couple of big startups" jump in, Birch says. "There are a lot of customers, and there are a lot of companies out there with funds."
Last year's strong rebound in used-vehicle prices helps some subprime consumers. Those shoppers often are trading in a used vehicle, and they now can get more.
Melinda Zabritski, director of automotive credit for Experian Information Solutions Inc., says demand will build slowly.
"I don't think today's consumers are willing to take the types of loans that a lender would even be willing to offer to minimize the risk on a high-risk loan," she says. Subprime "is an area where you're still going to see really tight financing."
Skittish consumersMany subprime consumers are unemployed or underemployed. In what remains a weak job market marked by continued home foreclosures, those consumers remain skittish about taking on high-interest auto loans.
In the third quarter of 2009, Zabritski says, the consumer interest rate on subprime loans had increased about half a percentage point from a year earlier to an average of 14 percent for the highest-risk category.
In contrast, rates were down slightly for prime-risk customers. "It's going to take some time," Zabritski says, before consumers are willing "to enter that sort of deal."
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