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Analysts Not Really Concerned About Subprime Auto Lending Growth

The U.S. automotive industry’s improvement is striking. At its present pace, it is not impossible to hit pre-recession levels, at least in new-vehicle sales.

However, overall subprime auto financing, repossessions and delinquencies are all up in the first quarter of this year.

According to data provided by auto market trends watcher Experian Automotive, the share of subprime auto loans in the overall loan market increased to 45.2 percent in Q1 2013 which is one percentage point higher than last year, but one percentage point lower in the same period in 2008.

Meanwhile, repossessions jumped almost 17 percent from 0.43 percent in the first quarter of 2012 to 0.50 percent this year. 30-day auto loan delinquencies increased by 1.3 percent while 12.4 percent in 60-day delinquencies. In addition, the average charge-off amounts for loan defaults rose by $600 to $7,401 this year.

Further, average credit scores dropped by 5 and 2 points in new-vehicle loans and used-vehicle loans, respectively. The average score for new auto loans is just 2 points away from what it was in the crisis year 2008.

Despite the figures which appear to imply an auto lending bubble, analysts are not too concerned about them yet.

According to the International Business Times (IBTimes), there are two simple reasons why auto lending is not yet a bubble.

First reason is people badly need their cars to get to work and they are willing to slash their expenses to avoid missing their car payments.

Eric Lyman of TrueCar, Inc. told the IBTimes that people preferred house foreclosures to auto loan defaults during the recession because they need to get to work. He also mentioned that an urban sprawl caused people to live quite far from their places of work.

The second reason is the tight used-car market. Used-car prices were at near-record highs in 2010 due mainly to car buyers flocking to used-car lots. Higher used-car prices are good for lenders as it means easier recovery of their loans in the aftermarket.

However, used-car prices are falling now because lease expirations are at above average level this year. This would send auctions a lot of great used-car deals.

Kelley Blue Book senior market analyst Alec Gutierrez told the IBTimes that auto sales are largely due to the availability of zero-percent financing and low-interest offers for new cars in the subprime market. He also said that increasing repos do not concern him now as they are still in relatively low levels. However, he may be more worried when subprime lending continues to grow despite higher interest rates.

Recently, comments by Federal Reserve Chairman Ben Bernanke have been suggesting that interest rates will rise soon which could help flourish subprime lending and cut down new-car purchases.

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