Riskier borrowers under inflation pressure frozen out of US car loans

Lenders are extending fewer loans to the car buyers with the riskiest profiles, a sign that they are bracing for an economic slowdown that could test people’s ability to pay their debts.

The pullback in credit to so-called subprime borrowers comes as used-car prices remain high and record petrol prices increase the cost of driving a car. Interest rates are rising as the Federal Reserve works to contain inflation.

“A whole swath of consumers are just not going to be able to get cars,” said Jennifer Thomas, a portfolio manager at Loomis Sayles.

Instead, lenders are concentrating on consumers with better credit scores, a trend that can be seen in pools of auto loans that are used to back issuance of new debt through so-called asset backed securities.

Global Lending Services has cut the number of loans to borrowers without a credit score to 5.6 per cent of its latest deal this month, down from closer to 8 per cent in its deal sold at the same time last year, according to data from S&P Global. The South Carolina-based lender also cut the percentage of loans to other borrowers in the lower tier of subprime credit, while it boosted the number of loans to borrowers with a credit score of more than 600.

Subprime is defined differently by various data providers, but it is commonly understood as a Fico credit score of less than 620.

The subprime lending arm at Santander bank has also boosted lending to borrowers with a credit score of 601 and above. It reduced the number of loans to borrowers who lack a credit score to less than 8 per cent in its latest deal this year, from more than 12 per cent for deals at the start of 2020 and the end of 2019, according to S&P.

At General Motors-owned AmeriCredit, more than 13 per cent of the loans in its deal this month were to borrowers with a Fico score of 660 or higher, up from less than 3 per cent last year.

Amy Martin, head of auto ABS research at rating agency S&P Global, said that there has been a similar trend across other subprime auto ABS issuers, as rising interest rates and soaring inflation are expected to put increasing pressure on consumers’ finances.

“A number of issuers have told us that they are trying to be more conservative, eliminating the lowest quality buckets given that they are concerned about inflationary pressures on their customer base,” Martin said.

Used car and truck prices are outpacing inflation in the US, rising 16.1 per cent year over year to May, the government reported last week. Over the past year, the average used car loan amount surged by nearly $4,000 for deep subprime borrowers, according to Experian, with the average monthly payment rising by $78 to $425.

Interest rates on loans in recent subprime ABS deals were typically around 20 per cent.

“A lot of issuers have just cut off the bottom end of consumers, saying they can’t afford these cars,” said Thomas of Loomis Sayles.

For outstanding loans, some borrowers are beginning to struggle to make debt payments. While overall delinquencies remain in line with seasonal trends, the number of subprime write-offs and borrowers more than 60 days past due on their payments has risen to a new record this year, according to data from Equifax.