Lenders making more subprime car loans: report

NEW YORK Tue Aug 30, 2011 2:10pm EDT

Honda Accords sit parked outside SanTan Honda Superstore in Chandler, Arizona in this June 2, 2011 file photo. REUTERS/Joshua Lott

Honda Accords sit parked outside SanTan Honda Superstore in Chandler, Arizona in this June 2, 2011 file photo.

Credit: Reuters/Joshua Lott

NEW YORK (Reuters) - Lenders are making more subprime auto loans again, reversing the cautious approach they adopted after the credit crisis, an industry research firm said on Tuesday.

The portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter from 37.2 percent a year earlier, according to Experian Automotive, a unit of credit bureau and research firm Experian Plc.

The data shows how keen lenders are to boost their loan books amid a sluggish economy. Car loans are seen by lenders like Ally Financial and Wells Fargo Co as relatively safe because they are collateralized and repossessing cars is easier than foreclosing on homes. Compared with house prices, used car values held up well during the recession.

Average credit scores for borrowers declined and the average term for their loans extended by one month to 63 months on new cars and 59 months on used cars, according to Experian.

"We are continuing to see growth in subprime, both new and used, and loans are becoming looser," Melinda Zabritski, director of automotive credit for Experian, said in an interview.

Executives at Ally Financial said in May that subprime car lending had become "very attractive" because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. Making the loans is part of Ally's strategy to grow by lending on more used cars.

Gina Proia, a company spokeswoman, said the company places "greater emphasis on the higher end of the nonprime spectrum" and only lends to people who show they can pay.

Ally made the second most used car loans in the second quarter, with 3.9 percent of the market, according to Experian. Wells Fargo was first with 7.17 percent of used car loans.

Industry veterans have said that while the loans have been attractive recently, more lenders are entering the market and competing for business by lowering prices, a trend that could lead to higher losses in the future.

In mid 2007, industry-wide loans to subprime borrowers made up 46.2 percent of the total. That easy lending led to a surge in delinquency rates before lenders turned conservative.

Tighter underwriting has resulted in fewer loans going bad. Loans delinquent by 30 days fell to 2.59 percent of those outstanding in the second quarter of this year, down from 2.89 percent a year earlier, according to Experian.

"Even though we have growth in subprime of late, our delinquency rates right now are extremely low," said Zabritski. "We have an overall stable market because we did have a lot of conservative lending in 2009 and 2010."

Repossessions have declined, too, with the percentage of car loans ending in repossession falling to 0.59 percent from 0.62 percent.

In another measure of market share tracked by Experian, the five most frequent lenders and their portions of the number of loans of all kinds made during the quarter were: Ally Financial, 6.93 percent; Wells Fargo & Co, 5.79 percent; Toyota, 4.84 percent; JPMorgan Chase & Co, 4.75 percent; and Honda, 3.92 percent.

(Reporting by David Henry; Editing by Tim Dobbyn, Dave Zimmerman)

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