Bigger Risk Appetites, Less Competition Spur Subprime Volume

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After eight straight quarters of credit tightening, lenders are widening risk parameters to reach more subprime borrowers.

The reentry into lower credit tiers stems from an increase in lenders’ use of alternative data to underwrite loans, which translates to more affordable options for subprime borrowers, said Brian Landau, senior vice president and automotive business leader at TransUnion.

Additionally, competition in the sector has diminished as some lenders retreated to the safety of prime and super-prime credit, he added.

Third-quarter subprime auto originations increased 7.3% year over year, after falling 7.8% in the prior-year period. The higher loan volume comes amid a 15-basis-point decline in delinquencies, to 6.82% as of Sept. 30.

Landau interpreted the origination growth and delinquency stabilization as signs of strength in the market, which he expects will continue through yearend.

Specifically, fourth-quarter growth will likely hinge on used-car financing and expansions in near-prime and subprime lending, Landau said.

Still, headwinds on the horizon include rising interest rates and oil prices, along with steel and aluminum tariffs.

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