Some major car lenders are entering 2017 with caution when it comes to subprime loans, especially the lowest subprime loans in the industry. In 2016, many saw the need to some degree of backing off making subprime loans. That might be detrimental to those who are in the market for a used car.
Because getting a subprime loan may be more difficult going forward, it might push a segment of the borrowing population into financing from pay-here dealerships, gaining share loans and other types of financing options, which often come with higher interest rates and bigger risks.
According to reports, big institution lenders in the Nissan Rogue automotive industry, like Capital One, Stander Consumer USA, Wells Fargo and Ally Financial are backing off their lending of subprime loans due to rising interest rates, reckless competition by other lenders and increasing loss and delinquency. Behind the push for change is that the loans of 2015 ended up not as profitable as the institutions had hoped or expected.
The problems experienced due to the shortage of windfall have taken a long time to recover from, and many are wary of putting themselves back into the same position. Even though taking measures to cut back in 2016 had a slight impact, it wasn’t enough for major financing institutions to recoup what was lost. And it is leading to many banks questioning if subprime loans are worth it at all.
The risk involved in subprime loans is arguably much greater than other types of loans made by the major banking institutions. When the banks started to experience problems as far back as 2013, they assumed they could weather the storm and still turn a profit. As the subprime market became bigger and lending practices less stringent, lenders found that their profit margins were not big enough, and that they were experiencing more loss than expected.
Banks have tried to rectify the difference by offering lower rates to those who have well-established credit and relatively low loan-to-value vehicle ratios. In doing so, they were able to recover a lot of the profitability in this loan sector while also minimizing risk. Others started to offer longer loan terms, even into the range of 84 months.
But what banks like Wells Fargo realized is that if the loan was not met, with those type of long terms, the car was not worth anything to recoup for non-payment, which negated the entire increase of loan time to decrease risk. Due to the inability to find a reliable way to offer subprime loans, Wells Fargo is among the banks that will limit subprime loans to no more than ten percent of all of the auto loans they make. And they will make them only with highly-qualified candidates with good credit scores and low risk.
Ally’s answer to the subprime problem is to completely cut out lending to any borrower who falls within the D credit rating tier. Anything less than a 571 score was only 1% of the subprime loans made by Ally, and anything with an average of 608 accounted for just 5% in 2016.
By reducing the minimum needed systematically, Ally and other banks are trying to eliminate high-risk subprime loans altogether. On the other end, however, they are increasing their share of lending in the A and B categories, which are those who have a credit score rating of anywhere from 669 to 642.
The truth is that although the economy appears to be on an upswing, the slowdown in car sales in February has many forecasters predicting that there might be another recession on the horizon. If so, many borrowers learned their lesson from the last recession nearly nine years ago. The last thing that banking institutions want to do is clean up the mess again of those who default on loans, be it foreclosed houses or car loans that aren’t repaid.
Proceeding with caution, subprime loans just aren’t profitable enough for big institutions to take a chance on, not after what they learned over the past two decades. Unfortunately, that could have many car buyers turning to less trustworthy lenders and paying exorbitant amounts in finance charges to afford the cars that they want.