If you’re looking for the next lending disaster, subprime automobile loans certainly have that potential. From Matt Turner at businessinsider.com:
There is a lot of talk out there about the auto-loan market right now.
The default rates for auto loans in oil-producing regions in the US have been jumping, while hedge fund honcho Jim Chanos has said the auto-lending market should “scare the heck out of everybody.”
John Oliver has used time on his show, “Last Week Tonight,” to highlight the ways some used-car dealerships take advantage of people.
Now, in a presentation Monday at the Barclays Financial Services Conference, Gordon Smith, the chief executive for consumer and community banking at JPMorgan, has set out some eye-opening statistics on the market.
To be clear, JPMorgan decided back in 2013 to pretty much pull out of auto lending to subprime borrowers — that is car buyers with the worst credit profiles — and the presentation slides are at least in part designed to reassure investors that JPMorgan isn’t participating in the loose lending that its competitors might be.
With that said, let’s dive in:
Close to half of all auto loans are to borrowers with a sub-680 FICO score.
For example, 47% of all auto loans in the first half went to borrowers with a FICO score of less than 680, and 21% of all loans had a loan-to-value (LTV) ratio of more than 120%.
To put this in plain English: Half the loans are going to risky borrowers, and the banks are giving many of them them more money than the car itself is worth.
One in eight loans is to borrowers with a sub-620 FICO score and has a loan-to-value ratio of more than 100%.
The riskiest combination, that is borrowers with weak credit who are also taking on more debt than the value of the car, still isn’t the bulk of auto lending.
About 5% of industry auto loans are to people with a FICO score of less than 620 and have an LTV ratio of more than 120%.
A further 8% of loans are going to those with FICO scores of less than 620 and have an LTV of 101% to 120%.
That adds up to 13% of total loans, or about one in eight.
To continue reading: We just got some data on auto lending, and it’s setting off alarm bells
that depends if you actually believe that a FICO score means anything. I just paid cash.
Paying cash is not the American way and could subject you to future investigation.