Car Shoppers With Subprime Credit Being Squeezed Out By High Prices

The high prices for both new and used cars are having the biggest effect on subprime borrowers. Car shoppers with good credit are buying more used cars as they are more widely available than new cars right now, and they are usually more affordable. However, this means less to go around for shoppers with no credit or subprime credit.

Prime-Risk Borrowers Dominating Market

Prime-risk borrowers have dominated the market for new cars in normal years, but these days, many of them are going for used cars, which means the subprime share is thinning out across the board. For used cars and new cars, prime-risk borrowers accounted for over 65% of auto loans and leases in the second quarter of 2022. To compare, the second quarter of 2019 showed a share of 61% for prime-risk borrowers. Looking at new cars only, prime-risk borrowers accounted for over 81% of the share, which is up from 74% in the second quarter of 2019. That’s not surprising considering the average payment for a new car loan is $667, which is up from $582 only a year ago.

Subprime Shoppers Facing Depleted Inventory

According to Experian Automotive, prime-risk borrowers are those with credit scores of 661 or higher. Why are subprime borrowers being crowded out? The main reason is the computer chip shortage, which is causing low inventory for new cars, and that same low inventory is causing rising demand for used cars. As more used cars are being bought up by prime-risk borrowers, the overall inventory for used cars has gone down, leaving much less to choose from for subprime shoppers. With sales of new cars down, fewer buyers are trading in their used cars when they buy new ones. High demand and low supply mean higher prices, and the rising interest rates make things even worse in that area.

Subprime Shares For Used Cars Down

Subprime market share for new cars was just under 19% for the second quarter of 2022, compared to 25% in the second quarter of 2019. For used cars, prime-risk borrowers had a nearly 55% share in the second quarter, which is up from 51% in the second quarter of 2019. Subprime shares were down from nearly 50% in the second quarter of 2019 to 45% in the second quarter of 2022. Subprime borrowers are usually defined as those who have credit scores below 600, but it can differ from lender to lender. If you’re shopping for a used car, it’s a good idea to find out exactly what your credit score is so that you can be prepared. Your interest rate is likely to be over double that of prime borrowers. You can mitigate that by having a larger down payment, or you can try to get a loan with a co-signer.

Even though the landscape for subprime borrowers looks bleak right now, inventories should start stabilizing later this year and into early 2023.