Increase In Subprime Car Loans Could Lead To Trouble

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When it comes to buying cars, there has been a growth in lending to people with sub-prime credit. Lenders are also extending loan terms. But both could be signs of danger.

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Transcript

ROBERT SIEGEL, HOST:

As the auto industry has rebounded, banks have been making more loans to people with less-than-stellar credit. One of the largest subprime auto lenders, Wells Fargo, is now putting a cap on those loans. The bank worries that the growth in these loans is getting risky. But for the most part, other banks believe these borrowers are highly motivated to meet their obligations, as NPR's Sonari Glinton reports.

SONARI GLINTON, BYLINE: As consumers, we have choices - tons of choices - not just what to buy, but how to pay for it and when. For example, here in Southern California, where it's warm, you might forget to pay the gas bill every now and then. But we love TV in LA, so you might pay the cable bill early.

MELINDA ZABRITSKI: Yeah, absolutely. We refer to that as payment hierarchy.

GLINTON: Melinda Zabritski knows a bunch about payment hierarchies. She's director of automotive credit for Experian, the giant credit ratings agency.

ZABRITSKI: Several years ago, most people thought that, you know, the mortgage was the very first thing that got paid. And then subsequent other debt obligations like cars and credit cards, you know, gas bill, et cetera.

GLINTON: Zabritski says that several years ago, people in the credit world saw consumers change those payment hierarchies.

ZABRITSKI: They really began to pay their auto loan first. And it makes sense, especially, you need that car to get to work and you need that job to pay everything else. So with that, we see that delinquency on car loans remains pretty low, and low especially in comparison to other types of debt.

GLINTON: Consumers understand that while it can take years to foreclose on your house, you don't have to miss that many payments before the repo man shows up. Now, while consumers have changed, it took a while for the industry to catch up, as Karl Brauer from Kelley Blue Book says.

KARL BRAUER: We definitely, you know, whipsawed back and forth from having too much credit to not having hardly any credit after the explosion of the economy, largely due to bad credit being given to too many people. And we're easing back to having fairly easy credit on the car side.

GLINTON: That easy credit, along with a lot of pent-up demand, has helped to boost car sales, especially in recent months. With interest rates being low, investors are looking for places to get returns. Now, investors like subprime car loans because they have high interest rates and low default rates. Brauer says there's a but, though.

BRAUER: I think it can lead to a little too much exuberance some time or a little too much competition for that money. And then it becomes, you know, well, who's willing to give away the most credit or willing to cut their standards for loans the furthest? And that's where you can get in trouble.

GLINTON: Consumers are starting to get loans with longer and longer terms, as long as seven years. Though subprime loans in the car business make up about 20 percent of car loans, which is up from 10 percent during the recession. Question is, is it time now to worry?

THOMAS LIBBY: My name is Thomas Libby, and I'm an automotive analyst with IHS Automotive.

GLINTON: Libby has an answer.

LIBBY: I think maybe this isn't emphasized enough. Times now are actually terrific.

GLINTON: Problem is, Libby says, things won't always be this way.

LIBBY: This is almost as good as it's ever been. So in a couple of years when it levels out, it will not be in a growth phase. So there'll be even more pressure and then - then there will be more of a possibility of a higher mix of questionable loans with more underwater situation then.

GLINTON: Then is when the worrying can commence. Sonari Glinton, NPR News, Culver City. Transcript provided by NPR, Copyright NPR.