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Are Risky Loans Really Driving Auto Lending Growth?

Auto loans made up the bulk of consumer lending increase in June this year, a sign that auto lending is up.

While concerns about whether auto loans made to borrowers with non-stellar credit are causing the recovery, the Federal Reserve Bank of New York (FRBNY) found that subprime auto loans are still below pre-recession levels.

Auto loan origination started declining in 2008 at the onset of the financial crisis. The third quarter of 2009 was an exemption with the Car Allowance Rebate System a.k.a. “Cash for Clunkers” that slightly affected overall originations.


About 23 percent of new car loans in the second quarter of this year were issued to risky borrowers or those with credit scores lower than 620. The figure for this exact segment years before the crisis hit was around 25 to 30 percent.

Meanwhile, new auto loans issued to borrowers with credit scores above 720 settled at 45 percent this year. It peaked at more than 50 percent during the crisis.

The figures show that auto loans, in general, have not reached the highest levels in the pre-recession years. It is chiefly because young people are not borrowing as often and as much as they used to.

People aged 18 to 29 are borrowing the least so far this year. Meanwhile, older borrowers have reached or exceeded the amounts of auto loans they had originated in the pre-crisis years. Other groups are still behind their pre-recession peaks.

Consumers, in general, have been willing to purchase new cars by financing them. But the younger members of the population seem to draw from auto loans and mortgages as higher student debt burdens them.

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