A new survey suggests that a bubble in the subprime auto loan market is unlikely.
The monthly average credit score for auto loan borrowers in 2014 increased by 10 points for loans closed by LendingTree’s network lenders, according to a study recently released from the Charlotte-based loan marketplace. The monthly score of those closed by network lenders rose by 12 points.
The report’s results suggest that lenders aren’t making the kinds of risky loans that could give way to a bubble, although they are originating a larger number of loans to borrowers with subprime credit, which is defined as a score at or below 640. The data shows that lenders may actually be more selective.
“Our data does not substantiate the likelihood of an upcoming crisis,” Rick Finch, general manager of LendingTree Autos, said in a statement. “Although auto backed securities increasingly contain subprime loans, loan defaults are not rising at a rate that signal imminent danger.”
Banks started ramping up auto lending after experiencing a post-crisis slowdown in other types of loans like home mortgages. Loans to subprime borrowers now account for a quarter of new auto loans, the New York Times recently reported.
Growth in the segment has given way to concerns that the market is overheated and that lending practices – including longer repayment periods and increased loan balances – have become relaxed.
That’s prompted Wells Fargo, one of the largest subprime auto loan lenders in the U.S., to announce it will scale back on loans issued to borrowers with damaged credit. The San Francisco bank will cap subprime auto loans to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion.
Still, the subprime car loan market is a fraction of the size the subprime mortgage loan market was at its peak. LendingTree’s Finch emphasized the difference in borrowing for the two types of loans.
“The mentality of someone paying for a car is different than someone paying a mortgage,” Finch said. “Missing car payments affects one’s ability to get to work and continue earning a paycheck. People are more likely to make auto payments a priority based on need, and most seek to remedy car financing issues quickly.”