The subprime sector in recent months has been regaining share, signaling some loosening in underwriting practices. In fact, subprime lending accounted for nearly 40% of total loan financing ― including independent and franchised dealers ― as of Sept. 30. Last quarter’s 39.9% share was up from 36.7% in 3Q10, according to Experian Automotive’s latest data. Among prime loans, marketshare fell to 60.1% from 63.3%.
Specifically, 21.9% of loans new-vehicle loans were made to people with subprime credit, up 14.8% from the prior-year period.
Credit scores have been on the decline of late, too. “Scores continue to come down year-over-year,” said Melinda Zabritski, Experian’s director of automotive credit, during a conference call yesterday. The average credit score for new vehicles was 763 in the third quarter, down six points from 3Q10. For used vehicles, the average credit score was down seven points to 676. “We’re not quite back to 2008 credit scores, but definitely lower than we were in 2009 and 2010,” she said.
Interestingly, used vehicles financing is trending toward older models. Last quarter, 58.8% of the used vehicles financed were for model years from 2006 to 2011. This time last year, 2005-to-2010 vehicle vintages represented 63.4% of used-vehicle financing.
“You can see the later used-model vehicles are representing a smaller piece of the used-vehicle pie,” Zabritski said. “We are certainly seeing older vehicles increasing their role in the finance marketplace. It’s important to look at how far back in financing you bring into your portfolio.”
Looking deeper into the used-vehicle market, “independent dealers lost a little bit of momentum this year,” she said. Independent dealers were down to 28.9% of all used-car financing, whereas franchise dealers on the used-vehicle side moved up to 71.1%. Historically, the ratio has been closer to 70%-30%, she noted.
Meanwhile, there has been an overall return to new-vehicle financing ― 39.4% of all vehicles financed in the quarter were new, up 0.9% from last year. Used-vehicle financing was down 0.6% to 60.6%.
Additionally, banks accounted for 42.2% of total vehicle financing, up from 36.0% last year. Here’s a look at how other lender segments fared compared with 3Q 2010, according to Experian:
- BHPH: 8.9%, up from 8.4%
- Finance/Other: 12.7%, up from 12.5%
- Credit Unions: 17.4%, down from 19.5%
- Captives: 18.7%, down from 27.6%
It looks like interesting news. Can Experian tell you if their definition of a sub-prime score has changed in the last four years? If so, how has it moved? Up, down, roller-coaster?
Any similar news from the other 2 credit companies?
One would expect the average credit score to decline if there are more sub-prime being financed as a % of vehicles. Or is there something else like maybe prior sub-prime borrowers that could not get financing were paying down debt and finally able to get their score up to just over the threshold score of lenders?
Frank — as always, thanks for the comment. I don’t think I can answer your question about whether Experian’s definition of a subprime score has changed in the past four years. I’m fairly certain that the credit scores Experian classifies as “subprime” have not changed, but I guess I wouldn’t be surprised if some of the calculations used to reach those scores are different now than they were in 2007.
As for the lower average credit score, it definitely makes sense that if more subprime borrowers are being financed, then the average score industry-wide would decline. Certainly, lenders these days are more willing to make loans to borrowers with lower scores, a scenario that didn’t hold true two years ago. Not only that, but lenders are more willing to make those loans to subprime borrowers on new vehicles, not just used ones. Though the Experian data points to only a slight uptick in new-versus-used volume, I think that ratio will continue to climb (in favor of new) in the next few quarters.
If your statement is correct about changes in the calculations, then the math laws of commutation would apply and in effect they have changed the score threshold.
Another factor would be the down payment required to get sub-prime financing.
Any info on what the down payments are?
Remember, all indirect financing is “collateral lending”. I would think that lenders would be looking for more customer equity in deals than they did in their lax underwriting days. Or in the reverse at a minimum, at least no financing of gingerbread items associated with the cars.