One of the key drivers of the auto loan boom, according to some, has been driven by “subprime” loans, or loans to those with less than perfect credit. And this has, supposedly, put the auto loan market on a precipice … except new data reveals that isn’t the case.
Prime Space In The Subprime Market
New data from Experian Auto has shown that the subprime market has dropped to 19.7 percent of the market, the lowest we’ve seen the subprime auto market in three years. Unlike 2012, however, the auto market is currently seeing an enormous boom, up 11% from this time last year. In other words, there are far more subprime loans, but their share of the market has stayed roughly the same.
This was unexpected for quite a few in the industry. Concerns have been sounded recently that the overall numbers of subprime loans are rising rapidly, which is true; as the economy has shifted and people are working to get back on their feet, it’s been necessary for lenders to reach out more to borrowers who are dealing with financial problems. So the sudden drop in the subprime market is welcome, but unexpected.
Still, the auto loan market doesn’t change overnight, and it raises a few questions. Why did this happen? And what does it mean for those looking for an auto loan?
Part of it is simple mathematics; there are more auto loans of all kinds for all borrowers. 2014 was an enormous year for the auto lending sector, and 2015 is shaping up to be another record year with more loan originations and more money coming into lenders of all sorts. In short, a rising tide lifts all boats, and due to the profitability and cost-effectiveness of auto lending, more money is in play for subprime loans.
Secondly, it drives down investor concern about the auto market. One of the fundamental concerns some analysts have shared is that the auto lending market is approaching a bubble, where loans are being issued without concern for the long term, and that said bubble would pop as soon as these bad loans came due. This has kept some capital out of the market as investors are concerned that it’s about to go bust.
What this market share data illustrates, though, is that bubble concerns have been overblown. It’s true that there are more and more subprime loans, but as the data shows, lenders are ensuring that they don’t take on too many relatively risky loans. That’s well removed from the financial crash of 2008, where poor planning and too many bad loans suddenly collapsed the real estate market.
For borrowers, it’s good news as it eases concerns about the market. Even in a thriving market, all it really takes is some jittery investors to derail an entire industry. In other words, by showing the market is secure, paradoxically it makes it more secure.
In short, if you need an auto loan, now’s the best time to apply. Regardless of your credit, the market is rapidly growing and loans are available.