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October 2012, F&I and Showroom - Feature

by Melinda Zabritski

It’s been almost four years since subprime mortgage sent the economy into a tailspin and soiled the reputation of all things not designated as "prime." Based on second-quarter auto finance data, below-prime auto finance is back — at least for now.

Experian Automotive’s second-quarter data showed that below-prime lending surpassed pre-recession levels, with the share of loans made to credit-challenged customers hitting 25.41 percent. That’s up 14 percent from the second quarter 2011 and nearly 2 percent above the frenzied peak reached in the second quarter 2007.

In that 2007 time period leading up to the crash, auto financing in the high-risk tiers was heating up. For the second quarters of 2007 and 2008, below-prime loan share was 24.96 percent and 24.49 percent, respectively. But by the second quarter 2009, as the credit markets tightened up, the segment’s share dropped to 17.57 percent.

The key factor is the car buyers themselves. They continue to make payments on time, driving second-quarter delinquency rates to historic lows and dropping the total dollar volume of at-risk loans as well. The repossession rate also enjoyed a year-over-year decrease.

Lessons Learned

The return of subprime auto finance is great news for dealers and automakers, but finance sources aren’t necessarily throwing caution to the wind. In fact, lenders balanced the sharp rise in subprime lending during the quarter with lower loan-to-value (LTV) ratios. For new vehicles, the average LTV ratio was 109.55 percent, down from 115.65 percent in second quarter 2011.

This aggressive yet balanced approach means more customers are getting approved for car loans. For dealers, that means a larger pool of potential buyers. For the finance companies, keeping LTVs down should help mitigate any future losses.

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