Wednesday, July 16, 2014

What is a Sub-Prime Borrower?

According to Experian's State of the Automotive Finance Market Report for the first quarter of 2014, scores are divided into five categories of ranges. 740 and up puts your score in the "Super Prime" category. 730-680 is "Prime" and 679-620 is "Non-Prime".  That leaves all other consumers in the "Sub-Prime" category with 550 and under being described as "Deep Sub-Prime". According to their Open Loans by Risk report, over 21 percent of all open loans are below prime, with deep sub-prime lending being the highest growing category of open loans. The average credit score of an auto financing customer dropped 10 points from the first quarter of 2013 from 731 to 721. In summary, more lenders are willing to take chances with sub-prime borrowers as more and more consumers are falling into that category. According to Credit-Report-101, the national average FICO credit score as of 2014 in the US is 639, which would place the average national consumer in the "Non-Prime" category. 


That's it. The only piece of information used to determine your lending category is your score. Your score represents the amount of risk a lender assumes by loaning you money or goods. 
More and more sub-prime borrowers are being approved for auto loans. Reports suggest that sub-prime lending has been the single highest growth category in lending. Experian reports that over 45% of all auto loans went to sub-prime borrowers. Less stringent auto credit means that you may be approved for an auto loan that you would have been denied for a year ago. Sub-prime auto lenders don't worry market watchers as much as mortgage lenders because auto loans are less risky in general when compared to sub-prime mortgage lending. Car loan payments are smaller and more manageable, even for those less likely to pay. The loans are scheduled to be re-payed over a much shorter period of time. The value of the collateral is less susceptible to change and is much easier to repossess and re-sell in event of default. Buyers are much more likely to keep from having their transportation to work from being repossessed.

Where does this leave you? That depends. It's looking to continue to be a buyer's market. With more consumers being affected by low credit scores, lenders are opening up lending to those who would have not been able to get a car loan in the past. Buyers with better credit are dwindling and more in demand, resulting in competitive interest rates for those upper category borrowers. 

If you find that you fall into the sub-prime category and are looking to finance a vehicle, your local dealer is the first place to start. While you will likely be denied financing by credit unions or private lenders, a dealership that specializes in bad credit auto loans or Buy Here Pay Here will be able to finance you with a down payment and few items of income and residency verification.

At Used Car World we work primarily with consumers struggling with credit challenges. We offer all kinds of borrowers access to quality, affordable vehicles. We offer guaranteed approvals. You can apply online on our website at www.usedcarworldpa.com