Separating fact from fiction on auto loans

by. Henry Meier

I had a longer commute than usual into work today (if I wanted to spend an hour and a half in the car on a Monday morning I would live in Long Island and not in suburban Albany, thank you), but it helped me decide what I should do my blog on this morning.  Actually, the latest commercial from upstate’s ubiquitous car dealer bragging about how he once got credit for a dead person clinched it for me.

As I pointed out in a previous blog, there has been increasing concern that subprime auto lending is the next mortgage crisis in waiting.  The argument goes that with larger banks increasingly securitizing auto loans, dealerships and banks, credit unions and financers they work with have a huge incentive to qualify even the most irresponsible borrowers.

Is the perception reality?  An analysis performed by the Federal Reserve Bank of New York answers the question with a qualified yes.  Looking at data from the Fed’s Quarterly Report on Household Debt and Credit, researchers point out that there has actually been a smaller percentage of auto loans being originated for borrowers with credit scores below 620.  Currently, these borrowers represent 23% of all originated car loans, which is actually lower than the 25% to 30% witnessed in the years prior to 2007.  So, is the conventional wisdom wrong?  Not really.  According to the researchers “the dollar value of originations to people with credit scores below 660 has roughly doubled since 2009.”  What’s more, this gain in origination value reflects an increase in the average size of loans being made to these borrowers.  In other words, larger loans are being made to people with bad credit and financial institutions are more than willing to spread out the length of repayments.

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