Riskier borrowers under inflation pressure can no longer qualify for auto loans in the United States

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

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

“A whole bunch of consumers just won’t be able to get cars,” said Jennifer Thomas, portfolio manager at Loomis Sayles.

Instead, lenders are focusing on consumers with better credit scores, a trend that can be seen in auto loan pools that are used to support the issuance of new debt through what we calls asset-backed securities.

Global Lending Services reduced the number of loans to borrowers without a credit score to 5.6% in its last deal this month, from nearly 8% in its deal sold in the same period last year, data shows. of S&P Global. The South Carolina-based lender also reduced the percentage of loans to other borrowers in the lower tier of subprime credit, while increasing the number of loans to borrowers with a credit score over 600.

Subprime is defined differently by various data providers, but is generally understood as a Fico credit score below 620.

Santander Bank’s subprime lending arm has also boosted lending to borrowers with a credit score of 601 and above. It reduced the number of loans to borrowers with no credit score to less than 8% in its latest deal this year, from more than 12% for deals in early 2020 and late 2019, according to S&P.

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

Amy Martin, head of automotive ABS research at ratings agency S&P Global, said there was a similar trend among other issuers of subprime automotive ABS, as rising interest rates and the Soaring inflation is expected to put increasing pressure on consumer finances.

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

Prices for used cars and trucks are outpacing inflation in the United States, rising 16.1% year-on-year through May, the government announced last week. Over the past year, the average used car loan amount jumped nearly $4,000 for deep subprime borrowers, according to Experian, with the average monthly payment rising from $78 to $425.

Interest rates on loans in recent subprime ABS deals have typically been around 20%.

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

For current loans, some borrowers are beginning to have difficulty repaying their debts. While overall delinquencies remain in line with seasonal trends, the number of subprime mortgage write-offs and borrowers more than 60 days past due on payments hit a new high this year, according to Equifax data.

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