Auto loans: Return of the subprime borrower

Auto loans to people with less-than-stellar credit rose 8 percent last quarter, the first annual rise in three years.

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    In this Oct. 25 photo, the Ford logo is displayed at a dealership in San Jose, Calif. According to a new report, the percentage of auto loans going to subprime borrowers rose 8 percent in the third quarter compared with the same period a year ago.
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Consumers with less than stellar credit are getting car loans again as lenders loosen their standards, and the trend is likely to continue as more lenders get into the business.

The percentage of loans going to subprime buyers rose 8 percent in the third quarter, their first year-over-year increase since 2007, according to a report issued Tuesday by Experian, a credit reporting agency. For new cars, the percentage of loans going to subprime buyers rose 13 percent over the July-September period in 2009. The increase for used cars was 3 percent.

The majority of loans — 63 percent — still going to buyers with prime credit scores, which is defined as a 680 or above. But even that is settling into a more normal pattern. Before the recession, when credit was very loose, just 51 percent of loans were going to prime buyers, according to Melinda Zabritski, director of automotive credit at Experian. Last fall, when credit was tight, 66 percent of loans went to prime buyers.

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Another sign that the credit market is thawing: The loans people are getting are covering larger amounts and have longer terms. The average amount financed for new cars rose $2,530, to $25,273, over the third quarter of last year, while the average amount financed for used cars grew $977 to $16,706. The average terms rose by about a month, although the lowest tier buyers — those with scores of 550 or less — saw their terms rise by nearly four months.

Zabritski said the loosening in auto lending is likely to continue to grow in the near term. On Oct. 1, General Motors Co. finalized its purchase of AmeriCredit Inc., a Texas-based company that specializes in subprime lenders and has a $9 billion portfolio of subprime loans. AmeriCredit had already been helping GM with subprime loans, which amount to 4 percent of the automaker's sales. But GM now expects that to grow by a percent or two, a significant number considering that GM is on pace to sell more than 2 million cars and trucks in the U.S. this year.

Banks and auto financing companies feel they can afford to take bigger risks because consumers are being more cautious with their money and savings rates are up. The percentage of loans that were delinquent for 30 days fell 8 percent in the third quarter, to 3 percent, while the percentage of loans delinquent for 60 days fell 17 percent, to less than 1 percent.

Zabritski noted that last quarter was the first time Experian reported a decrease in delinquencies since 2007. "It was down for all lenders, which is a very positive sign," she said.

Used car prices also have been strong, so lenders can assume they won't be stuck with a vehicle they can't get rid of.

Experian collects information on all open auto loans in any given quarter, and also gathers data on new loans from state motor vehicle registries.

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