In an attempt to mitigate a potential economic disaster, lenders are starting to tighten back their loan qualifications, making it harder for borrowers to get auto financing today.
If you have credit below what is considered a prime score, it would be harder for you to qualify for a car loan now than five months ago. The number of new car loans given to subprime borrowers or those who have scores below 620 is now at a two-year low ($25.9 billion). The number of subprime borrowers also dwindled to 20 percent from 30 percent ten years ago. It looks like the effort is paying off. Now, about a third of the new loan originations are given to borrowers with good credit (FICO 760 up).
Fear is the driver
The rise in loan payment delinquencies may have helped propel lenders’ actions. Delinquencies, or those debts that are 90 days or more behind on payments increased by 3.82 percent in the first quarter of the year, the highest in over four years.
But while the current situation is favorable for both borrowers and lenders, and the market in general, automakers are not so happy about the new sales numbers.
Bad for the autolords
Currently, they rely heavily on discounts and in slowing down production to keep balance with the pooling inventory. This could also be bad news for some workers in the auto industry. Some automakers such as Ford plan to forgo some jobs to make up for the loss in production.
The current subprime panic is certainly keeping lenders at check, making sure that only good risk borrowers or those who are less likely to default on their loans have access to credit, mitigating disastrous economic repercussions. But with the current $1.2 trillion auto loan debt with a quarter lent to subprime borrowers, will this last-minute attempt to put a cap on the ink really prevent the mess from spilling?