Auto lenders go back to subprime borrowers

Tue Sep 4, 2012 3:59pm IST

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* Subprime loans on new cars return to pre-bust levels

* Increase in time to pay and sums borrowed

* Some loan-to-value ratios improve

By David Henry

Sept 4 (Reuters) - U.S. lenders are giving as large a portion of new car loans to subprime borrowers as they did just before the start of the financial crisis, according to a new study.

Subprime, or less qualified, borrowers received 25.41 percent of all loans on new vehicles in the three months through the end of June, up from 22.29 percent in the same period a year ago and more than the 24.96 percent at the start of the financial crisis in 2007, Experian Plc's auto finance research unit said in a report released Tuesday morning.

The report also found lenders more aggressively making loans to subprime borrowers of used cars. Subprime borrowers received 56.46 percent of loans on used cars in the quarter, up from 52.70 percent a year earlier.

Banks and other lenders are under pressure to make up for profits lost to shrunken loan portfolios and low interest rates that persist five years after the financial crisis began.

Outstanding auto loans amounted to $682 billion at the end of the second quarter, still less the $701 billion in 2007, despite the easing of standards. The balance, however, was up about 5 percent from a year earlier.

Experian uses a proprietary scale to score the credit history of borrowers and determine which are prime and which are subprime.

Melinda Zabritski, director of automotive credit for Experian, said lenders are showing caution, however, on another key front: how much they lend against the value of new vehicles. The average loan-to-value on new cars was 109.55 percent, down 0.61 percentage points from a year earlier.

"Despite the rise in subprime loans overall, there is still a strong sense of managing risk," Zabritski said in a statement from Experian. "Because the overall lending environment has improved, lenders are making loans available to a wider range of customers."

On used cars, however, lenders required less cushion in value against loss. The average used car loan-to-value ratio rose to 126.62, up 0.62 percentage points from a year earlier.

The average amount financed for a new car rose $474 to $25,714. For a used car, the average amount financed rose $370 to $17,433.

The average time to repay new and used car loans increased by one month, to 64 months for new cars and to 60 months for used cars.

Lenders have been encouraged by the fact that more borrowers are making payments on time. The percentage of loans delinquent 30 days fell in the quarter to 2.52 percent from 2.59 percent.

Capital One Financial Corp nearly doubled its share of new car loans, which lifted its share of all second-quarter loans to 4.36 percent, according to Experian.

The biggest auto lender, U.S. government-owned Ally Financial Inc, saw its market share slip to 6.68 percent from 6.93 percent a year earlier.

Ally, which was originally the auto lender owned by General Motors Co, is facing the expiration next year of preferred lending arrangements with GM and Chrysler Group LLC in which the carmakers subsidize zero-interest loans. [ID:nL2E8J128H}

Capital One, meanwhile, has been expanding its deposit base and increasing its loan portfolios with its acquisitions of U.S. credit card assets of HSBC and deposits of ING Direct.

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