Credit Spigot Opening Up for Subprime Auto Borrowers

Lenders are loosening up and expanding the pool of eligible borrowers in auto loans.
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Getting a loan for anything these days can be tough. Only Americans with virtually spotless credit records can obtain mortgages. Consumer credit card availability remains crimped. Small businesses, too, are finding it hard to secure financing to expand their operations.

But there's one exception in this credit-constrained economy: auto loans.

Consumers looking to buy a new set of wheels have found it increasingly easy—and cheap—to borrow money in recent months, with new auto bank loans surging to a seven-year high between January and March this year, according to Equifax.

The money is even flowing for borrowers with a few dings on their records. According to a recent survey of bank risk professionals by financial analytics firm FICO, lenders expect an increase in car loan availability for consumers with damaged credit, often referred to as "subprime borrowers."

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"The feeling is there is more loosening in auto lending than there has been and will be in other sectors of the consumer credit world," says Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.

There are a few reasons for the surge in auto lending. For starters, there's a lot of pent-up demand for cars and trucks. The fleet of automobiles is the oldest it's ever been, and Americans are finally starting to trade in their clunkers for a new set of wheels. Last month, cars sold at an annualized rate of about 14 million, up more than 20 percent from last year.

But if lenders are still squeamish about mortgages and credit cards, why are auto loans any different?

In general, auto loans are less risky for lenders, experts say. Historically, they have lower delinquency rates than other types of consumer credit, according to Jennings, and cars are an easier asset to repossess than, say, a house.

"Car loans are heavily secured," says Greg McBride, senior financial analyst at "It's not like a house where you stop making the payments and they take two years to kick you out of the house. You miss two car payments and it's not going to be in the driveway in the morning."

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But just because lenders are loosening credit and broadening the pool of eligible borrowers, it doesn't mean we're headed back to the Wild West days of free-flowing consumer credit. While banks and other lenders are sticking their pinky toe into the waters of subprime auto lending, they're going to make sure they're compensated for the risk. That means borrowers with less-than-perfect credit will have more access to credit, but it'll come at a price: significantly higher interest rates.

And while the term "subprime" conjures all sorts of bad connotations, it's not likely auto lending will follow in the same footsteps as mortgage lending did a few years ago.

"[Subprime lending] doesn't appear to be coming back in an irresponsible way," Jennings says. "It's not that all the sudden people with [FICO] scores of 400 are now getting all these loans."

Meg Handley is a business reporter for U.S. News & World Report. You can reach her at and follow her on Twitter.