Borrowers with subprime credit continue to be squeezed out of new vehicle loans – and even for used vehicle loans, borrowers with subprime credit are losing shares, says Experian Automobile.
“You can see this continued decrease in subprime, the last two years having seen a slightly more noticeable drop in the percentage of subprime, as the prime rate continues to rise,” said Melinda Zabritsky, senior director of automotive financial solutions for Experian Automotive, during a webinar on the first quarter of 2021.
In the webinar, Experian defined subprime as credit scores of 600 or less, and prime as 661 and above. Experian calls the middle category “nonprime,” defined as credit scores 601 to 660. The reduction in the subprime share is a long-term trend that appears to be accelerating.
Subprime represented only 17.75% of total loans and leases issued in the first quarter, including new and used vehicles. This is a sharp drop from 22.31% a year ago and almost 10 percentage points from 27.35% five years ago.
For new vehicle loans only, subprime was just 7.4% of the first quarter total, down from 9.65% a year ago. For used vehicle loans, subprime represented 26.14% of the total, up from 30.85% a year ago.
The probable causes are fairly obvious, starting with higher prices for new and used vehicles. This is another long-term trend that has accelerated since 2020 and the COVID-19 pandemic.
COVID-related business closures have created a shortage of new vehicle production in 2020. New vehicles are still in short supply, due to a shortage of computer chips needed by auto assembly lines. At the same time, demand for new vehicles is strong – at least among borrowers with high-risk credit and secure employment.
The average amount of new vehicles financed in the first quarter was $ 35,392, up $ 1,559 or 4.6%, from $ 33,833 a year ago, Experian Automotive said. The average amount financed for used vehicles was $ 22,375, up $ 1,686, or 8.1%.
At the same time, based on the concept of risk-based pricing, borrowers with subprime credit pay much higher interest rates on average. Borrowers with credit scores of 501 to 600 paid an average annual rate of 17.26% on used vehicle loans in the first quarter, Experian said. Borrowers with a credit score of 781 or higher paid an average of 3.71%.