Borrowers With Subprime Credit Are Getting Priced Out Of New-Car Loans

Borrowers with subprime credit continue to get squeezed out of new-vehicle loans — and even in used-vehicle loans, borrowers with subprime credit are losing share, according to Experian Automotive.

“You can see this continual decrease of subprime, with the last two years experiencing a bit more of a notable decrease in the percentage of subprime, as prime just continues to grow,” said Melinda Zabritski, senior director of Automotive Financial Solutions for Experian Automotive, in a webinar reviewing the first quarter of 2021.

In the webinar, Experian defined subprime as credit scores of 600 or below, and prime as 661 and above. Experian calls the in-between category “nonprime,” defined as credit scores 601 to 660. Shrinking share for subprime is a long-term trend that appears to be accelerating.

Subprime accounted for just 17.75% of total loans and leases originated in the first quarter, including new and used vehicles. That’s a steep decline from 22.31% a year ago, and down almost 10 percentage points from 27.35% five years ago.

For new-vehicle loans only, subprime accounted for just 7.4% of the first-quarter total, down from 9.65% a year ago. For used-vehicle loans, subprime accounted for 26.14% of the total, down from 30.85% a year ago.

Likely causes are obvious enough, starting with higher prices for both new and used vehicles. That’s another long-term trend that accelerated since 2020 and the COVID-19 pandemic.

COVID-related business shutdowns created a shortage of new-vehicle production in 2020. New vehicles are still in short supply, thanks to a shortage of computer chips needed for auto assembly lines. At the same time, new-vehicle demand is strong — at least, among borrowers with prime-risk credit and secure jobs.

The average new-vehicle amount financed in the first quarter was $35,392, up $1,559 or 4.6%, from $33,833 a year ago, Experian Automotive said. The average amount financed for used vehicles was $22,375, up $1,686, or 8.1%.

At the same time, based on the concept of risk-based pricing, borrowers with subprime credit on average pay much higher interest rates. Borrowers with credit scores from 501 to 600 paid an average annual percentage rate of 17.26% on used-vehicle loans in the first quarter, Experian said. Borrowers with credit scores 781 or higher paid an average of 3.71%.

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