Elevated car prices and interest rates have been squeezing lower-income buyers.
Earlier this month, a company called Tricolor abruptly filed for bankruptcy. The Texas-based firm specialized in extending auto loans to buyers with poor credit ratings — or none at all — many of whom were undocumented.
That so-called “subprime” auto market has grown to $80 billion, according to Bloomberg.
Over the past few years, cars and trucks have gotten way more expensive.
“Pre-pandemic versus now, they've gone up significantly,” said Jessica Caldwell, head of insights with the car-buying site Edmunds.
How much exactly? According to Cox Automotive, 29% to be exact. The average price of a new car is over $49,000 now. That means buyers are taking on more debt.
“The average auto loan borrower in the U.S. owes about $5,000 more than they did in 2019, and what's interesting about that is that's not just for borrowers with the highest credit score,” said Joelle Scally, an economic policy advisor at the Federal Reserve Bank of New York.
Subprime borrowers have seen their loans grow a similar amount, Scally said. Typically, those are lower-income borrowers, she noted, which means their car loans are a bigger burden on their budgets.
“There's going to be a higher payment on those loans, in part due to the higher balance, but also because rates are higher now,” she said — over 7% percent for new cars and 11% or more for used vehicles, according to Edmunds.
At the same time, according to Bankrate’s Shannon Martin, lenders recognize many consumers are stretched thin, so they’ve made it easier for some customers with lower credit scores to get loans.
“There's been offers extended of, you know, longer loan periods, lower down payments,” she said.
And that’s been locking some borrowers into loans stretching to seven years, in some cases.
“That also kind of puts consumers in a very precarious situation, where — if it's hard for you to make those payments — you're locked in for a much longer time than you would have been over the past few years,” said Martin.
Access to subprime financing may get a bit trickier after the collapse of the lender Tricolor for two reasons. No. 1: Tricolor, like most auto lenders, had its own lines of credit with banks, which are now facing losses.
So, we may see banks “being more circumspect about the advances they make to subprime auto lenders,” said Adam Levitin, a professor of law and finance at Georgetown Law.
Plus, lenders typically bundle up all the auto loans they extend to borrowers into what are known as asset-backed securities. Sound familiar?
If those securities now look a bit riskier to investors, “we may see less investor demand for those,” Levitin said. “That's going to basically push up the cost of subprime auto credit.”
And that could make it that much harder for some drivers to buy cars.
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