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Bad credit is looking good to auto lenders

They're banking on subprime and deep subprime borrowers for new business.

By MSN Money Partner Jan 5, 2012 6:16PM

This post comes from Marilyn Lewis at MSN Money.


Who knew that defaulting on your mortgage would make you attractive to lenders? These days, The Wall Street Journal reports, mortgage trouble may mark you as a good prospect, at least for an auto loan.


The article, "Auto lenders speeding past mortgage woes," says:

Auto lenders are pursuing an unlikely growth market: people who have fallen behind on their mortgages.
In the first three quarters of 2011, auto lenders issued roughly 205,000 loans to borrowers whose credit records showed they have been at least 60 days past due on their mortgage or experienced a foreclosure, up from roughly 80,000 during the same period in 2006, according to credit bureau Experian PLC.

Credit card issuers, too, are looking twice at people who once may have been rejected as credit risks. In the last four years, 36% more credit cards were issued to borrowers who'd been through foreclosure or had been 60 days or more behind on mortgage payments, says the Journal.


Growth in "deep subprime"

The number of subprime auto loans grew in the third quarter of last year, says credit-rating company Experian in its December report:

According to its quarterly automotive credit analysis, 21.87% of all new vehicle loans went to customers in the nonprime, subprime and deep subprime categories. The largest percentage increases were in the two highest-risk segments -- deep subprime, which jumped 17.3%, and subprime, which jumped 17.8%. Nonprime loan share jumped by 12.5%.
The analysis also showed that the average consumer credit score for both new and used vehicle loans dropped in Q3 2011. For new vehicle loans, the average credit score fell from 769 in Q3 2010 to 763 in Q3 2011. For used vehicle loans, the average fell from 683 in Q3 2010 to 676 in Q3 2011.

"Nearly half of all consumers fall into non-prime, subprime and deep subprime risk categories," Experian's Melinda Zabritski said in an autumn 2011 report on auto lending (requires sign-up). Post continues below.

What the heck is "deep subprime"? We wondered, too. Chatting by phone, Experian spokeswoman Roslyn Whitehurst explained. In the reports on auto lending, Experian used its Scorex PLUS proprietary credit scoring system:

  • Superprime, 740 and above.
  • Prime, 680-739.
  • Non-prime, 620-679.
  • Subprime, 550-619.
  • Deep subprime, below 550.

Although the percentage growth in deep subprime loans looks huge, it's a small proportion of all auto loans. At the end of the second quarter last year, just 2% of auto loans were to deep subprime customers, according to Experian's fall report.


Changing ideas about risk

"Are lenders nuts?" you might be wondering. Not hardly. They have a number of reasons for embracing the subprime category.


For one, they're seeing fewer bad auto loans. With bad loans from 2007 and 2008 mostly behind them, repossession rates are falling, too -- "from 0.67% in Q3 2010 to 0.62% in Q3 2011," according to Experian.


Also, the recession has stood conventional lending wisdom on its head as consumers keep up their credit card payments while defaulting on their mortgages.


That's apparently true, too, with auto loans. The Journal writes: "Whereas mortgage payments used to be sacrosanct for most borrowers, credit experts say, falling home prices and rising unemployment during the recession led more people to pay their car loans and not their mortgages."


And lenders, after all, need customers. "Providing loans to these risk tiers opens the market to significantly more prospects," Experian's Zabritski says in that autumn report.


And then there's the profit. Subprime is apparently tantalizing because, if the risk is managed well, the higher interest rates charged to borrowers with lower credit scores can be huge.


Good for the industry

For example, the Journal tells the story of Roberto Suarez, who's "behind on the mortgage on an investment property in Sanford, Fla., after a temporary bout of unemployment."


After his car was wrecked, Suarez bought a new one:

Mr. Sanchez received a 60-month loan with a 15.99% rate. A borrower with top-tier credit would have received a rate of about 5.99% on a similar loan, Mr. Hurley (Sanchez's auto dealer) says.

An auto lender summed up his company's rationale to the Journal:

Steven Bowman, chief credit and risk officer of General Motors Financial, says the company now gives less weight to mortgage delinquencies and will consider offsetting factors, including a good score on the company's proprietary measure of credit-worthiness.
"Before the last recession," he says, "a mortgage delinquency was considered an early warning sign that bad things would happen." Now, he says, "we think there are some opportunities for good, profitable growth."

All this lending helps the whole auto industry, says Experian: "This was good news for automotive manufacturers, as nearly half of all consumers fall into non-prime, subprime and deep subprime risk categories."


Car sales rose 10% last year -- up 9% in December alone, Automotive News reported today. A recent survey of independent analysts forecasts another 6% to 7% rise in auto sales this year.


More on MSN Money:

Jan 20, 2012 11:46AM
Credit card companies are allowing things to be put on a person's credit that they do not even owe. I think the laws regarding what the bureaus can put on your credit must be run by the person first. Of course the company is going to say it is owed, even if asked 15 times., but this may not be the truth!  Why ask the companies and Why allow the bureaus to do whatever they want and get away with it?  One credit person told me that they checked with the company and they said the charge was good, when it so bogus it would make your head spin.  If the company says it is owed (when most are just trying to get back at people who go elsewhere for business)  then the consumer has no say in it. That is so ridiculous. Credit reporting is also skewed because they never report the ten years of good payments that one makes, only 1 late payment that will ruin your credit.  I hope this system is changed in the legislature as it is unlawful and inaccurate. 
Jan 19, 2012 11:05PM
Hooray for those nice bankers - Grab up those high interest high risk loans and suck those poor saps dry - then take the car back when they can't pay the monster interest rates. Do I smell something - like residue from Fanny Mae and Freddy Mac? Don't worry, banker boys - Obama and the good ol' US Taxpayer will be there to bail you fat bas------s out again.

Less people are defaulting on their car loans because they live in their cars now. It's the new "mobile mortgage", and the ultimate in extreme downsizing.


15.99% APR? Seriously?! The lowest rates are around 4%.  Once people start defaulting on their car loans, the lenders will ask themselves how could they have gone so wrong. They either have short memories (really short), or they must have been living on another planet during that little thing called the sub-prime mortgage housing crisis? This is just a new chapter in the old predatory lending story.

Jan 19, 2012 9:02PM
It seems the more I owe, the more money they want to loan me for a year for a fee of 3% and no interest .  This is an unsecured loan by the credit card companies.  I know that they don't want me to pay it on time, but I do.  It is mind boggling to know that I have a low credit score but the credit card companies as a whole have given me an unsecured line of credit at 3% for $95,000.  They better hope I stay health because I am worth zilch.
Jan 20, 2012 11:58AM
Wiserandolder77 you are right! The credit rating system in this country is old and outdated...and it does suck, big time!
Jan 20, 2012 1:19AM
Somebody is lying, I have the poorest credit and was turned down even after I said I could put 50% down on the car, let me know where these lenders are cause there not here in central FL.
Jan 20, 2012 11:54AM
This says what any economist knows, industry needs the masses! If half the nation gets a  bad ding on their credit the auto industry cannot afford to stop selling to this growing market.  The recession has hit many people hard but in order for our economy to pull itself up and out of this situation "second chance credit opportunities" are a must (we just need to make sure were a little more careful second go around).  If the masses can't buy then there is no need to add additional jobs to produce.  Pretty simple!     
Jan 20, 2012 6:13AM
lawyers making laws that lawyers profit from?Unheard of.
Jan 20, 2012 12:30PM
These lenders are idiots. The reason there are fewer bad loans is because the recession is forcing people to buy used, where loans are smaller or non-existent. But now that they are giving out these loans to the unqualified, expect to see the number of defaults skyrocketing. We'll be bailing out yet another sector. Get ready for it.
Jan 20, 2012 1:05PM
The most complacent business people eventually learn that the customer is king and that they are nothing without him. 
Jan 20, 2012 1:57AM
Car dealers have been going after bad credit customers for over 25 years.  They tell them what they can buy (a bad car/truck with a high book) then hit them over the head with max finance rate. It's very profitable for the dealership, but a ton of aggravation and usually not so profitable for the salesperson.  That's the good news. The bad news is that all other businesses i.e. banks, hospitals, etc. have learned very well the car dealer special ways of screwing us all. America is gone but not forgotten.
Jan 19, 2012 9:12PM

i don't care who you are if you don't have a car you cant keep a job when the busses don't run  you cant take your children to day care, or pick them up from school , be to work on time . people are more willing to work over time,or spend more time in school if they have a secure ride home from work or school.

When i got my first car it was during the Ragan years  when the prime lending rate was 18.5% so to get an Auto loan at 22% was a deal. it got me to work where i could support my new family.

Jan 20, 2012 10:50AM

15.99% could work if it was a cheap car and you could pay it off fast. More likely, the car will wear out well before the loan is paid off, then starting the cycle all over. In most of America, you must own a car to live so I can see how the payment would be a priority for consumers.

Jan 20, 2012 4:16AM
Used cars must be choking the dealerships about like repo houses are clogging the bank vaults.  Maybe some of that mattress money that the banks have stashed away for better times, is getting a little moldy?  Nothing like a little circulation to revive the economy.  Now if Congress, the Administration and Big Business could quit squabbling for a minute .. who knows, might get this economic freight train wreck back on the track for another whistle stop.
Jan 20, 2012 11:45AM

This article is crap. There is nothing good about bad credit.  I get these offers all the time regardless of the fact I STILL don't have a job.  I can't get a job because my credit rating sucks-even though I wired $660 Million dollars a few years ago I'm now not trustworthy enough to run a cash register.  And the employers want four year degrees for jobs that don't even require a two year degree; and someone who has 24/7 availability.

Jan 20, 2012 12:19PM

There must be some truth to this article, my credit score tanked due to a disability and a sharp decline in my income.

I checked my score last week through two credit reporting agencies and my scores were 490 & 570 and I had a previous auto repo in March 2010 and a recent auto repo in December 2011.

I was able to get a $20,000 + new car loan with 50% down with a reputable lender ( AmeriCredit ) with 11.5% interest.

Jan 20, 2012 12:19AM

The ONLY way someone should be considering thi, is if they have a job that can cover the bill (say for instance the falling behind was due to unemployment during the recession, we arguably are still in), and this can be done easily enough the choice won't be between paying on the car, buying gas, or eating.


Then PAY AHEAD, should the lender allow this, which ideally it will, especially with the high interest rates.  In this way if the car payment is $150, and one can pay $200 in the given month.  If the terms of the line of credit/loan, CC, or what have you allows, it's always best to pay MORE then the minimums...  This way, you're, driving down principle faster then required, less interest over the lifetime of the thing; also good for credit ratings.  Combine that with paying off some back debt, by targeting those old debts to pay in full each one as one's able....  Unless one's using this as a stepping stone to help clean up one's credit and improve one's score; they're wasting their time taking on the liability, if they can help it (aka their old car still has some life in it).

Jun 17, 2013 3:19PM
I found a <a href="">bad credit truck dealer</a> finally, how can I check if this place is legit?
Feb 15, 2012 11:55AM
Re; credit scores, age discrimation is at play no matter how good your payment record . You had to give your date of birth on all applications therefore they can discriminate against you due to age.
Jan 20, 2012 2:57AM
Credit Acceptance was my loan company when times were / are tough, yeah the rates have been high, but they are pretty easy to work with. I have had to explain MANY times that my car payment was eaten up by having to have work done on my 2001 Ford Explorer instead. This was not a car I would have purchased by choice but it was the only 1 available when I needed a vehicle FAST. They are understanding and are letting me finish making my payments by sending in half every 2 weeks instead of the $316.00 in 1 lump sum.  I see newer cars for less per month payments ( the cute new little Audi (Jennifer Lopez's commercials) that would be smaller payments - would I ever be fortunate enough to be given a loan by them??? doubt it!
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