Subprime lending has been widely vilified since the housing bubble burst, but that hasn’t stopped lenders from doling out subprime auto loans, reports Jennifer Bjorhus of the Star Tribune.A new survey by FICO says a far number of bank risk professionals expect lenders to taken on even more risky loan candidates (i.e. with credit scores below 680) through next year:
“…While only 25 per cent of risk managers see subprime lending increasing in the next six months, half of those who see an increase expect it to come in auto loans,” Bjorhus writes.
But unlike subprime mortgage lending, experts don’t exactly look at subprime auto loans with the same prejudice. There are a couple of reasons why:
Fewer delinquencies. For starters, there are fewer delinquencies on auto loans than any other major type of loan, including mortgages, reports Equifax. That’s in part because people need their car to get back and forth to work. Since it’s tied to a paycheck, consumers will find ways to make their car payments “over and above payments on mortgages,” FICO’s chief analytics officer, Andrew Jennings, told Bjorhus.
Less risky for lenders. Since lenders have more flexibility to deal with a default on a car loan as opposed to a mortgage, they’re more willing to loan to consumers with lower credit scores. It might take a couple of years for a lender to foreclose on a home, while a creditor can repossess a vehicle as soon as the owner defaults in most states, according to the Federal Trade Commission.
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