A new report from DBRS Inc., a credit rating company, shows that lenders should expect to take a large loss on sub-prime auto loans made last year. The study anticipates that 18 percent of these sub-prime loans are likely to be defaulted on, leaving lenders out of almost one-fifth of the money they lent. If this prediction is accurate, it represents an increase over 2012 and 2014, which saw sub-prime default rates of 12.8 percent and 14.4 percent, respectively. The report analyzed data from six large sub-prime auto loan securitizers to reach its conclusions.
In addition to those large securitizers, DBRS also expects smaller lenders to be hit. The report looked at nine smaller sub-prime loan issuers that had restructured or launched since the recent recession. DBRS believes that these will take a larger loss, with borrowers defaulting on more than 19 percent of all loans made. This is also an increase from 2013 (16.7 percent) and 2014 (18.4 percent).
Lenders can usually repossess and re-sell vehicles when lenders default, but they are recouping less of their outstanding loans. In May of 2016, lenders recovered an average of 63 percent of outstanding loans, down from 67 percent in May 2015.
While sub-prime auto loans make up only part of the auto loan market, this could indicate that the market is beginning to weaken, especially when coupled with the fact that used car prices are no longer as strong as they were.
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