Auto loans climb on the backs of borrowers with low credit scores

Auto Loan Portfolio Risk Assessment

Contrary to expectations, October car sales were not affected by the government shutdown. Analysts expect a 12 percent climb from one year ago, to 15.4 million, according to information compiled late last month by Reuters.

“The expectations were that car buyers would wait on the sidelines, but because of pent-up demand and credit availability, car sales are expected to increase 7 percent from last month,” Kelley Blue Book’s Alec Gutierrez said.

Gutierrez touches on a point—increased credit availability—that has been confirmed by data provided by the New York Federal Reserve. According to Quartz, the organization announced in August that loans for automobile purchases had climbed to levels not seen since before the start of the recession. This spike can be attributed to the fact that more than one quarter of loans for new vehicles were provided to borrowers with sub-500 credit scores.

Although lenders themselves need to be more discerning in choosing which borrowers represent an appropriate level of risk, through tools like loan management software, there are also measures in place to prevent levels of delinquency from returning to their mid-2010 peak.

The Consumer Financial Protection Bureau (CFPB) does not have direct oversight capabilities over auto loans, but it is able to “supervise any financial institution with more than $10 billion in assets,” which comprises some that manage auto loans. The CFPB is specifically targeting loan mark-ups, as it is “worried that the practice provides too much incentive for dealers to push car buyers toward a loan they can’t afford.”

The CFPB will only go so far to protect lenders from themselves and borrowers from auto loans that are likely to become delinquent, so ultimately, the onus will rest on lenders themselves to employ comprehensive risk assessment strategies.

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