Why the subprime pool is growing …

Subprime loans are easier to get and cheaper, too, as competition among lenders heats up.

"We are definitely seeing an increase in subprime loans," said Amy Martin, director of structured finance ratings for Standard & Poor's in New York. "Part of that is increased demand. You've probably seen the reports that the average age of cars on the road is 10 to 11 years. Certainly, there's a lot of pent-up demand. The other part is that the lenders are in a better liquidity position today than they were in the credit crisis. During the credit crisis they were quite constrained."

That's encouraging news for dealerships, since the subprime sector had been rebounding more slowly than prime. Still, U.S. auto sales continue to rise from their 27-year lows of 2009. February's seasonally adjusted annual rate of 15.1 million light vehicles was the highest in four years.

Signs of a subprime comeback:

• Experian Automotive data show that subprime loans made up 41.5 percent of all auto loans in the fourth quarter of 2011, up from 38.4 percent a year earlier and 36.4 percent in the fourth quarter of 2009.
• As competition has revived, interest rates on subprime loans have become more affordable. Consumer interest rates are down for all categories of subprime loans. However, the improvement is smallest for the riskiest, deep-subprime loans, to an average interest rate of about 17.8 percent, down only slightly from 17.9 percent a year earlier.
• Terms also are getting longer, as customers seek lower monthly payments and lenders approve longer loans for riskier customers. The average term for deep-subprime customers on a used-car loan was 53 months in the fourth quarter, up from 51.2 months a year earlier.

In addition, subprime auto lenders themselves are having an easier time borrowing money with which to make new loans.

Subprime auto lenders rely on asset-backed securities to raise money to make new loans. Prime-risk lenders, especially captive finance companies, use asset-backed securities to raise funds, too. But independent subprime lenders rely more heavily on the asset-backed securities market.

Asset-backed securities are where an auto lender basically sells a bundle of loans to investors. The investors in effect collect the income as the loans are repaid. That way, the lender gets new money right away to make new loans.

Citing figures from the Securities Industry and Financial Markets Association, Standard & Poor's expects a combined total of about $80 billion in prime and subprime automotive asset-backed securities to be sold in 2012, up from $68.1 billion in 2011 and $57.9 billion in 2010.

In 2012, S&P expects subprime to account for about 25 to 30 percent of the total, up from 24 percent in 2011. That would be about $20 billion to $24 billion in subprime asset-backed securities this year, up from $16.3 billion in 2011.

That's just so much more money subprime auto lenders can use to make new loans.