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Reasons for Subprime Auto Loans’ Comeback

Subprime auto loans are booming again. The latest data from Experian Automotive showed that auto loans made to subprime borrowers or those with credit scores lower than 700 in Vantage scale are slightly up in the second quarter of this year.

From April to June, 35.2 percent of auto loans are subprime, up from 34.9 percent in the same period in 2012.

According to National Public Radio (NPR), a non-profit media organization, there are four reasons why subprime auto loans are alive again.

subprime auto loans

First, lenders offering subprime car loans can charge interest rates of as high as 25 percent.

Second, fewer borrowers are defaulting on their loans. People are prioritizing car loan payments as they need their cars to drive to work.

Third, prices of pre-owned cars are at almost historic highs. In case borrowers default, lenders can still get almost all their money back—or maybe even more if they need to repossess the car and sell it at an auction.

Lastly, lenders can sell packaged auto loans to Wall Street which breaks them into pieces and sell them to investors.

In addition, the repossession rate dropped by 15 percent to less than one percent based on Experian Automotive data.

Auto loans that are 30 days delinquent also fell from 5.6 percent last year to 2.38 this year. It is the lowest second-quarter 30-day delinquency rate for the past seven years.

There are concerns about the likelihood of subprime borrowers getting stuck in auto loans they can’t afford to pay off. However, subprime auto loan rates may fall as lenders compete for the business of people with non-stellar credit.

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