With delinquencies down and auto manufacturers' finance subsidiaries drawing more reliable customers, U.S. banks are making more of their car loans to subprime borrowers, according to data from Experian released Tuesday.
U.S. banks made 36% of their car loans to subprime borrowers in the second quarter, up from 34% a year ago, according to Experian, which tracks credit information and data on nearly 700 million vehicles in North America. The car companies' finance units also moved up the credit scale, making 74% of their loans to borrowers that Experian rates as prime.
Average credit scores for new car loans from all lenders fell for the fourth consecutive year. Lending standards were strictest in 2009, when the U.S. economy was deep in a recession and many banks and automakers were desperate to conserve capital.
The overall shift down the credit spectrum in auto lending comes as banks face stronger competition. Their market share fell four points to 36% in the past year, while so-called captive finance companies of automakers gained more than seven points to 25% of the market. Credit unions, the third-biggest type of auto lender, lost two points of market share to 15%.
There is also evidence that consumers overall are in a better position to repay. The rate of car loans delinquent 30 days fell to 2.38%, the lowest in any second quarter since at least 2006, Experian reported.
Lower delinquency rates mean reduced costs to banks for making loans. The rate of loans ending in repossession fell to 0.36% in the second quarter, a record low, according to Experian.
Still, making loans to consumers with lower credit scores may mean higher costs to banks when they look to get a return on that money. The average term for new car loans in the second quarter was 65 months, one month longer than a year earlier. On nearly 20% of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
At the same time, the interest rates that banks expect to cover losses on bad loans are down. The average rate from all lenders on new cars was 4.46% in the quarter, down from 4.63% a year earlier, according to Experian. For used cars, the average rate fell to 8.56% from 8.95%.
Total U.S. outstanding auto loans rose to nearly $751 billion, up 10% from a year earlier.