K-Shaped Recovery Tightens Subprime Loan Market

Auto lenders appear to be tightening approval standards and cutting lending to customers with subprime credit, according to separate Feb. 17 reports from the New York Federal Reserve and the TransUnion credit bureau.

At the same time, credit demands for clients with subprime lending are also declining, implying that some of those borrowers could pull out of the loan market altogether, TransUnion says.

“If you look at the overall things look good. But as many economists have talked about, there’s a bit of a K-shaped recovery taking hold, ”said Matt Komos, vice president of research and consulting at TransUnion, in a telephone interview.

“K-shaped” means some consumers, such as buyers of new vehicles with secure jobs and good credit histories, have rebounded from the coronavirus shutdowns. This is the upper right leg of the “K.” While others, including many workers in low-paying service jobs, may still be unemployed. This is the lower right leg.

“There is a subset of consumers who are still struggling – we know they are still struggling. This is what we are really monitoring, and I think it is really demonstrated in the automotive market, ”says Komos.

Separately, on February 17, the New York Fed reports that auto shipments to customers with subprime credit are down for the fourth quarter, while most risk categories gained in volume in the latest report. on the New York Fed’s household debt and credit.

Lenders tighten up

Subprime auto loan initiations, defined as credit scores below 620, were $ 28.1 billion for the fourth quarter, down 9.4% from 2019, according to the New York Fed . Automotive origins include new and used vehicles, loans and rentals.

The largest risk category tracked by the New York Fed is the 760-plus credit rating, which rose 5.6% to $ 58.1 billion for the quarter. Credit scores of 720 to 759 increased the most, 8.9%, to $ 24.4 billion.

Satyan Merchant, senior vice president of auto at TransUnion, says it’s a “mistake” to say that subprime auto loans are down just because lenders are tightening.

“Is this a demand problem or a supply problem on the subprime side?” he asks rhetorically in a telephone interview. “It could be a combination of the two,” he says. “Consumers may not show up for these vehicles.”

TransUnion also reports that severe delinquencies on auto loans, defined as arrears of 60 days or more, increased significantly for customers with subprime credit in the fourth quarter compared to 2019, from 7.41% to 9 , 05%.

But overall, our page auto loans are “effectively stable everywhere else,” says Merchant. Serious delinquencies only accounted for 1.57% of total total auto outstanding for the fourth quarter, down from 1.5% a year ago.

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