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Banks Lend More to Subprime Borrowers as Auto Loan Delinquencies Drop

Banks are giving more car loans to high-risk borrowers as auto loan delinquencies drop and automakers’ finance units make more loans to more creditworthy borrowers, data shows.

According to credit tracker Experian Plc, about 36 percent of the loans originated by U.S. banks went to subprime borrowers in the second quarter of this year, up from 34 percent last year.

U.S. banks moved down the credit scale as competition got stronger. The market share of auto manufacturers’ financing arms jumped seven points to 25 percent last year. The banks’ share fell four points to 36 percent.

The third largest type of auto lender, credit unions, became slightly weaker with a two-point decrease to 15 percent.

Automakers’ finance subsidiaries made about 74 percent of their loans to prime borrowers.

The changes in lenders’ behavior came as new-car loans declined for four consecutive years. Lending standards were tight especially in 2009 during the economic recession when banks and automakers needed to conserve capital.

Meanwhile, the rate of 30-day delinquent car loans went down to 2.38 percent, the lowest of all the second-quarter rates since 2006, Experian’s latest report shows.

Repossession rate settled at a record low of 0.36 percent in the second quarter.

However, banks seem to have mixed feelings about the shifts. Low delinquency rate means reduced loan origination costs. But making loans to high-risk borrowers require higher costs.

For example, lenders were willing to take more risk, extending loan terms up to six to seven years, in almost 20 percent of new car loans, while the average loan term for new cars this year went up by one month to 65 months.

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