The spike in subprime auto lending in the US could cause headaches for less diversified lenders.  

The recent surge in subprime auto loans was a key theme in the November report on household debt published by the New York Federal Reserve. The report disclosed that an increasing number of auto loans are being given to customers with a credit rating below 660, which is regarded as the cut-off for what constitutes a 'good' credit score. In the second quarter of 2015, loans originated to customers who place below that mark peaked at $58.4bn, the highest level in 10 years (see chart one).

Chart one

 

Originations of subprime auto loans slowed slightly to $53.3bn in the following quarter, according to the report.

The New York Fed does not ­­specify whether these loans are used to purchase new or old vehicles, but the clue is in the ratings of the borrowers themselves. According to another report by Experian, a credit rating agency, in the third quarter of 2015 the average credit score for buyers of new vehicles was 710 and for old ones 650, suggesting that subprime loans are mostly used to finance the latter.

The same report also lists the top lenders in the used auto market (see chart two). At 6.71%, Wells Fargo enjoys the largest share of the market, followed by Ally Financial, which holds 4.87% of the used auto loans. In third position is Capital One Financial Corporation, which has 4.11% of the loans, followed by Santander Consumer Finance US with 3.36%. In fifth position is JPMorgan Chase, with 2.58% of the used auto loan market.

This uptick in subprime auto loans could be challenging for firms with the greatest focus on automobile financing. While large banks such as Wells Fargo and JPMorgan Chase have some of the largest piles of auto debt in the country, these loans are small parts of their enormous loan books – auto financing amounts to 6.54% of total loans at Wells Fargo and 7.06% at JPMorgan Chase.

But auto loans play a more prominent role at some of the smaller firms. At Capital One, auto loans amount to 19.24% of the total loan portfolio. In addition to auto financing, the bank also focuses on real estate and credit cards.

At other banks, the emphasis on auto loans is larger still. For Ally Financial, which is the largest lender in the retail car market in the US, auto loans constitute 58.9% of total loans. The situation is similar for Santander Consumer, which is the fourth largest lender in the used auto market and whose primary focus is auto lending and refinancing. Another notable case is Carmax, which as a used car dealer focuses on providing financing for old vehicles.

For the most part, a potential downturn could miss financial arms of car companies, such as Ford, Nissan, Honda or Chrysler – these units are primarily active in the market for providing loans for new vehicles. An exception is Toyota, which holds 1.94% of the used car loans in the US.  

Chart two

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