Three Charts on America’s Not-So-Bubbly Subprime Auto Loans

U.S. consumers cut their collective household debt by $18 billion last quarter. While the nation pulled back on mortgages, borrowers took $30 billion in new auto loans—the biggest increase of any type of debt, according to data from the Federal Reserve Bank of New York (PDF). Although the rise in auto lending could raise a red flag, particularly for loans to subprime borrowers, a deeper look at the data shows that we are far from bubble territory.

Four economists at the New York Fed took a deep dive into auto loans a year ago and found that there wasn’t a “disproportionate or unusual volume of new loans being issued to riskier borrowers.” As we reported last week, it was unlikely that the trend was going to change significantly in the past year. The data reported by the New York Fed isn’t adjusted for inflation. Taking inflation into account, even with the recent growth the new data show the market is still below levels typical before the bubble of the mid-Aughts.

Subprime auto loans have grown relatively quickly in the past few years, largely because it crashed so hard during the Great Recession. But overall subprime loans now make up 22 percent of new auto lending, compared with the roughly 28 percent share on average from 2000 to 2004.

Beyond market share, lending to subprime borrowers (with or without inflation) is still below normal levels from before the last credit bubble.

A report this week from Moody’s Analytics found that delinquency rates for subprime loans have “improved to below pre-recession levels.” Last year saw subprime borrowers default more than in 2011 and 2012, but the rate has since fallen. “Nonetheless, it is an area that lenders will want to watch,” Moody’s said, “not only to avoid public scrutiny but to insure they are being compensated appropriately for the risks they are taking.”

Just because there’s no bubble doesn’t mean everything’s OK. There are plenty of examples of unsavory, if not likely predatory, subprime auto lending. We shouldn’t have to flag something as a bubble to bring, as Moody’s might say, “public scrutiny” to the market.

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