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Analysts: Credit Standards Will Continue to Weaken

Credit standards will continue to weaken as auto lenders vie for a share in the subprime market, analysts of Standard & Poor’s said.

The average LTV or loan-to-value ratio on auto sales to subprime consumers rose to 114.5 percent this year from 112 percent three years ago, S&P report said. The peak was at 121 percent in 2008.

Auto lenders allow car buyers with bad credit to borrow more by loosening credit standards as competition with more players for the subprime market increases.

A recent report from Citigroup Inc. said that the subprime market started thriving in 2010 when private-equity firms were attracted to high margins and low funding costs.

Auto loan originations to subprime borrowers have nearly doubled beginning the last quarter of 2009, reaching more than $18 billion in the same period last year.

According to credit grader S&P, higher LTVs normally reduce recovery values when an automobile is repossessed in the case of loan default. In addition, it is quite impossible for borrowers to stay current in their auto loans when their outstanding balance is greater than the car’s value.

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