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The State Of Sub Prime Auto Loans

Auto loans have shot past the $1 trillion mark in the United States and now make up a significant component of the overall consumer debt picture.

Subprime auto loans – which are riskier loans made to customers with poor credit – have helped to drive the market since the Great Recession. However, with auto loan delinquencies ticking up in recent months, investors have been searching for answers about the sector.

Are we in for some sort of subprime auto loan crisis, or is there another explanation for what is going on?

Subprime Auto Loans: a Shifting Market

The data and perspective in today’s infographic comes from consumer credit reporting agency Equifax, and it helps to explain what is potentially going on in today’s auto loans market.

Does the recent uptick in auto loan delinquencies represent the unhinging of the market, or is it just standard fare?

Auto Loan Segmentation

The auto loan market is surprisingly diverse, and it’s comprised of many different types of lenders.

Each lender has a unique set of criteria for their ideal customer. For example, banks want very little risk and typically only lend to customers with prime credit scores (620 or higher). Dealer finance companies, on the other hand, are willing to take on more risk in their portfolios, and usually key in on subprime customers.

In fact, there are six different types of lenders in the auto lending space:

  1. Banks: Depository institutions that loan money to third-parties
  2. Credit Unions: Member-owned financial cooperatives
  3. Captive Auto Finance: Financing arm of an auto brand (i.e. Ford Motor Credit Company, etc.)
  4. Dealer Finance Companies: Associated with a dealerships or dealer chains
  5. Monoline Finance Companies: Focus on auto loans through multiple dealers/platforms
  6. Independent Finance Companies: Offer auto loans and other loan types

Because they each approach the market differently, there is strong segmentation in the market. The following chart from Equifax shows a snapshot of loans made in Q1 of 2015 and their cumulative non-performance after 18 months on the books:

However, let’s look at this again by plotting the median credit score for new loans originated in Q1 of 2006, 2009, 2012, and 2015.

After the financial crisis, banks tightened credit standards until performance improved. Monoline and dealer finance companies, on the other hand, continued to lend to high-risk borrowers – and it is these companies that are seeing non-performance rates shifting higher.

In other words, it is the market share and relative performance among lenders that are the change drivers for aggregate loan statistics.

Courtesy of: Visual Capitalist

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Keeping up with the Joneses

It’s a very basic human trait. It happens all over the world, and people have been doing it since time immortal. Comparing ourselves against how we perceive our neighbors, coworkers, family, and friends is the inevitable result of striving to get ahead in this world. For the last decade, American’s have increasingly relied on credit to ensure that their house was just as big as the one next door.

Unfortunately, as we’ve seen over the last few years, this trend has come back to bite many of us where it hurts most; our checkbooks. The Huffington post estimates that nearly half of America are liquid asset poor, and many might not even realize it. Too many of us now live at a barely sustainable level that leaves us vulnerable to a single financial blow such as a medical emergency.

Savvy real estate investors need to understand this all too familiar condition and keep it foremost in their mind. Making sure that you can afford to sit on a purchase for longer than you mind be comfortable with is difference between turning a profit and panic selling to recoup a small percentage of your investment.

Also important is to avoid as much as possible is putting your home up against the others in your neighborhood in direct competition. Every house has its plusses and negatives, and focusing too much on ensuring that yours has a, for example, a bigger garage then whoever is next door can lead you to throwing money at a problem that’s not really a problem.

 It’s impossible to predict what priorities potential buyers are going to consider when looking for a home. True pros understand that buying and selling real estate involves hitting the same checklist every time. Basic repairs and upgrades are almost always the same basic thing for every property. Keep yourself impartial when deciding what work needs to be done and remember that this is a business, and the point of any business is to make money, period. It can be satisfying truly impart your “vision” of what the best house on the street should be, but it’s rarely worth all the time and money.

At the end of the day, the same competitive drive that makes us want to keep abreast with everyone around us is the same that compels us to work hard and earn what it takes to do so. It’s not a bad thing, but it can be an expensive and potentially wasteful attitude if not kept in check. Investing means playing it smart to keep your money flow going. Mr. Jones might have greener grass, but just remember that he probably thinks you have nicer bushes.


Chas Carrier is a cash home buyer and real estate expert who buys and sells homes throughout the DFW metroplex with We Buy Ugly Houses Dallas.

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