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Subprime Loans Strengthen Auto Sales

These days, dealerships sell to and finance car buyers with bad credit even if their scores are below 500. Buyers just need to have a good job, show proofs of income and put enough money down. This is very different from a couple of years back when most dealerships would not do business with them.

U.S. auto sales are en route to the best year in six years as they continue to be driven by people with subprime credit. Subprime borrowers accounted for over 27 percent of new auto loans in the first half of 2013, the highest recorded by Experian Automotive since 2007. Last year, it was just 25 percent and 18 percent back in 2009 when lenders drew back at the height of recession.

Subprime loans are funded by the investors who buy securitized subprime auto loans. According to Harris Trifon of Deutsche Bank, the issuance of bonds rose to $17.2 billion this year, totally surpassing the record in 2010 but still below the $20-billion peak in 2005.

Citigroup said that there are about 13 issuers this year that saw the asset-backed bond market lucrative as they make money for subprime car loans. Two of those are GM Financial (formerly AmeriCredit) and Exeter Finance which has issued $900 million worth of bonds backed by subprime auto loans.

Chrysler Group is one of those that have been experiencing the blessings of subprime auto loans. Last October, almost 60 percent of loans used to purchase Dodge vehicles had an annual percentage rate (APR) of above 4.2 percent industry average. Auto loans for Dodge vehicles have an average APR of 7.4 percent. More than 20 percent of loans have an APR of above ten percent. U.S. Dodge sales are 17 percent more this year until October than last year, reaching 43 consecutive months of increasing sales.

Credit-rating firm Standard & Poor’s said that subprime auto loan rates could reach 19 percent.

Regulators and some analysts are worried about subprime loans fueling auto sales. They see it as very similar with the housing bubble that stimulated the economic meltdown. But investors see differently and take it as an opportunity to raise interest rates when yields are low.

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