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Riskier borrowers under inflation pressure frozen out of US car loans

Lenders are lending less to car buyers with the riskiest profiles, a sign that they are bracing for an economic slowdown that could test people’s ability to pay their debts.

The slump in credit to so-called subprime borrowers comes as used car prices remain high and record gasoline prices are driving up the cost of driving. Interest rates are rising as the Federal Reserve tries to contain inflation.

“A whole bunch of consumers just won’t be able to get a car,” said Jennifer Thomas, portfolio manager at Loomis Sayles.

Instead, lenders are targeting consumers with better credit scores, a trend seen in car loan pools used to cover the issuance of new debt through asset-backed securities.

Global Lending Services has cut the number of loans to borrowers with no credit score to 5.6 percent from the latest deal this month, down nearly 8 percent from the deal sold at the same time last year, according to data from S&P Global. The South Carolina-based lender also lowered the percentage of loans to other borrowers in the lower-end subprime lending segment, while increasing the number of loans to borrowers with a credit score of over 600.

Subprime is defined differently by different data providers, but it is generally considered to have a Fico credit score of less than 620.

The Santander bank’s subprime lending arm has also boosted lending to borrowers with a credit score of 601 and above. According to S&P, it reduced the number of loans to borrowers who had no credit score to less than 8 percent in its latest deal this year, from more than 12 percent for deals in early 2020 and late 2019.

At General Motors, owned by AmeriCredit, more than 13 percent of loans in the deal this month were for borrowers with a Fico score of 660 or higher, up from less than 3 percent last year.

Amy Martin, head of auto ABS research at rating agency S&P Global, said there is a similar trend among other subprime auto ABS publishers, as rising interest rates and rising inflation are expected to put increasing pressure on consumer finances.

“A number of issuers have told us they are trying to be more conservative and eliminate the lowest quality buckets as they are concerned about inflationary pressures on their customer base,” Martin said.

Used car and truck prices are outpacing US inflation, rising 16.1 percent year-on-year through May, the government reported last week. According to Experian, the average used car loan amount has risen nearly $4,000 in the past year for deep subprime borrowers, with the average monthly payment rising $78 to $425.

Interest rates on loans in recent subprime ABS deals have typically been around 20 percent.

“A lot of issuers have just cut off the bottom end of consumers saying they can’t afford these cars,” says Thomas van Loomis Sayles.

For outstanding loans, some borrowers are starting to have a hard time paying off their debts. While delinquencies remain in line with seasonal trends, the number of write-offs on subprime and borrowers with more than 60 days of delinquency has risen to a new all-time high this year, according to data from Equifax.

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