Why Auto Loans Could Be The Next Subprime Crisis
Life + Money

Why Auto Loans Could Be The Next Subprime Crisis


A new report shows a growing number of car and truck owners are struggling to make their monthly auto loan payments. Experian, which analyses millions of auto loans, says the percentage of those loans that were delinquent or ended up in default with the vehicle being repossessed surged in the second quarter of this year.

"The number of delinquencies and repossessions rising is what we would expect as the auto industry sells more vehicles," said Melinda Zabritski, senior director of automotive finance for Experian Automotive. "But this slight uptick is one to keep an eye on."

Related: Driverless Cars Gain Public Acceptance, Sort Of

The surge in delinquencies and repossessions is being driven primarily by borrowers with subprime and deep subprime credit scores. Experian considers subprime borrowers as those with credit scores of 550 to 619 while deep subprime borrowers are those with credit scores lower than 550. Combined, the two categories accounted for more than 12 million of the open auto loans in the second quarter, which is 19.6 percent of all open auto loans.

"The number of subprime auto loans has definitely increased, but overall, those loans make up a smaller percentage of all auto loans than they did during the start of the recession in 2008 and 2009," Zabritski said.

Total balances of auto loans in America in the second quarter climbed 11.7 percent to an all-time high of $839 billion, according to Experian.

Experian says the rate of repossessions jumped 70.2 percent in the second quarter, with much of that increase coming from finance companies not run by automakers, banks or credit unions. Even with that increase, the percentage of auto loans that end in default is just 0.62 percent of all auto loans.

Experian also reports that the 30-day delinquency rate was up 0.2 percent and the 60-day rate rose 7 percent in the quarter.

"We're starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time; however, we have to keep in mind that these percentages are still extremely low," Zabritski said.

Related: Americans' Favorite Cars Are No Longer Sedans

While the percentage of borrowers falling behind on auto loans may be lower than average, the increase in the second quarter will renew concerns the auto industry is creating a bubble for subprime loans.

The Washington Post recently warned of a subprime auto loan bubble and cited the latest report from the Office of the Comptroller of the Currency. In that report, the office noted an increase in the number of loans in default that lenders have written off. "Average charge-off amounts are higher across all lender types over the last year," the report said.

Experian says the average charge-off was $8,149 in the second quarter. While that amount is up $932 compared to the same period of 2013, it is still well below the average charge-off during the recession. In the second quarter of 2010, the average bad loan was $11,161, as many Americans struggling during the economic crisis simply stopped making monthly payments.

Auto sales remain strong
The Experian report comes as the auto industry continues to sell cars and trucks at the strongest pace since 2007. Many expect auto sales to total 16.3 million to 16.5 million vehicles this year. Strong demand is being helped by automakers and dealers offering easier credit terms and spreading payments over a longer period of time.

In fact, the average auto loan now stretches over 5½ years with an average monthly payment of $474.

Spreading out terms of the loan and keeping the monthly payment as low as possible is one reason for the surge in sales to those with subprime and deep subprime credit scores.

Related: 5 Things Consumers Don't Know About Car Insurance

Zabritski knows many people are worried the industry is creating a financial storm that will end badly, but she says subprime sales are still far below normal.

"The growth in subprime auto loans looks dramatic because it was so restricted in the last few years," she said. "But this is not mismanaged, rapid growth. We are still well below levels we saw during the recession."

This piece originally appeared in CNBC.com.

Read more at CNBC: