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Subprime Auto Loans are Back, Should That Raise Red Flags?

Car Keys and Money
Car Keys and Money

Those consumers with subprime and deep subprime credit ratings are taking out more auto loans, but they are making up a smaller percentage of the total number of auto loans written in the U.S. “This is a sign of a very healthy auto loan market,” said Melinda Zabritski, Director of Automotive Credit for Experian.

Experian tracks the thousands of auto loans written each month in the U.S. and has released its findings for the second quarter of this year. Compared to the second quarter of 2011, the percentage of loans written for buyers with subprime and deep subprime credit ratings actually decreased from 19.8% to 19% year over year. Subprime credit scores vary depending on the credit rating agency. Generally, those with Subprime credit ratings have scores of 640 and below.

The Experian report also shows the percentage of loans delinquent after 30 and 60 days has declined compared to the same quarter last year.

The report comes at a time when some are wondering if auto dealers, banks and auto companies (most with in-house financing divisions) are becoming too aggressive selling and financing cars and trucks to buyers with poor credit records. While the actual number of loans written to buyers with subprime credit ratings has increased as the credit markets have loosened up, growth in the lower end of the market has been kept in check.

According to Experian nearly two–thirds of auto loans in America are held by those with prime or superprime credit scores (generally 680 and above). That segment of loans inched up a half percent to 65.1% in the second quarter.

Experian says fewer auto repossessions also plunged in the second quarter, falling more than 27%. A clear sign dealers and lenders have been successful at expanding the range of auto loans being written while not pushing too many cars/trucks to people who can’t afford a monthly payment.

One area where the industry has changed over the last five years is with loans written for luxury automobiles. Dealers say they have become more discerning about the credit records of those taking out loans for models costing $40,000 or $50,000.

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-Written by CNBC's Phil LeBeau

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