There's been a lot of hand-wringing in the press and financial circles lately that subprime automotive lending may have rebounded too fast or too far in recent years. And while it's natural that all of us should remember key lessons from the 2008 financial crisis, today's conditions in automotive subprime bear virtually no resemblance to the mortgage issues that precipitated that fateful bubble.
At Dealertrack, our view is that subprime lending today is at a healthy, rational level. We see this type of lending delivering a clear benefit to the economy in enabling more vehicles to be produced and sold and in giving borrowers an opportunity to rebuild their credit faster than nonborrowers.
Some recent media articles reflect a generally negative tone about subprime lending, often criticizing the interest rates that subprime borrowers must pay to get credit. This thinking also extends to some government regulators who argue that subprime lending is unfair and rates are too high or should be capped. Some of these same articles decry the addition of subprime lenders to the market, when in reality these new players will generally help increase competition and keep rates as low as possible for borrowers.
While our industry has seen subprime automotive lending standards ease in recent years, it's in large part because the requirements were so restrictive in the aftermath of the financial crisis. Lenders today use far more rigorous underwriting standards than during the heyday of the credit boom a decade ago. Even the new entrants on the lending scene have access to more relevant data than before to help them make sound decisions.
The reality is that subprime loans continue to perform well for lenders, and delinquencies today remain well below precrisis levels. And while loans originating in 2010 and 2011 may perform slightly better than those originating in 2013 and 2014, it is because the older loans were established during the years of the most restrictive subprime lending conditions.
Some large lenders likely are pulling back from subprime lending more because of greater regulatory scrutiny or some level of increased competition (potentially compressing lender margins), rather than an abundance of caution regarding portfolio risk. But a positive sign for automotive dealers and their customers is that many other subprime lenders are seeking to fill that void. So far in 2015, dealers have 89 percent more subprime lenders to choose from on the Dealertrack network than they did just five years ago.
The percentage of subprime applications made through our automotive finance network, which peaked at 58 percent in 2007, represents only about 35 percent of the total credit applications we receive today. Since car sales to all credit sectors have soared, it's only natural that subprime would recover along with the overall industry -- though, according to our data, at about half the rate of prime lending growth. So when you look at the facts, perhaps what really needs to burst is the notion of a subprime bubble itself.
You may email Raj Sundaram at [email protected]