Auto Loans and Risky Borrowers

Auto lending is up, which has brought concerns about whether risky loans are driving the trend. A new analysis from the Federal Reserve Bank of New York finds new auto loans to borrowers with low credit scores have indeed risen, but are still well below the levels seen during the credit bubble years leading up to the financial crisis.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax. The Car Allowance Rebate System, the stimulus program commonly known as Cash for Clunkers, took place in the third quarter of 2009 and is annotated in the chart with the star; the program had a noticeable but modest effect on aggregate originations and the mix of credit scores.

In the second quarter of this year, about 23 percent of new auto loans were issued to borrowers with credit scores under 620. Historically, the share of newly issued auto loans going to this riskier group was about 25 to 30 percent. The share of newly issued auto loans going to the borrowers with the best credit - scores over 720 - peaked at more than half during the recession. It’s about 45 percent now.

Federa Source: Federal Reserve Bank of New York Consumer Credit Panel, Equifax.

Auto loans over all, you’ll notice, are still not back to their pre-crisis highs. That is largely because young people are borrowing less frequently than they used to.

Source: Federal Reserve Bank of New York Consumer Credit Panel, Equifax.

The reduced appetite for mortgage and auto loans among the young has been attributed to higher student debt burdens, though the link between the two is disputed.