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Subprime Auto Loan Idea Proposal

Subprime Auto Loan Idea Proposal

Research Question: Will the subprime auto loan bubble burst in 2016?

Report Available: Feb. 4, 2016


Blueshift’s initial research finds speculators worrying about a subprime auto financing bubble, but government data has not yet shown rapidly increasing delinquencies, and several agencies and analysts predict a stable subprime auto loan market in 2016. Other economic indicators, including real estate and student loan bubbles, soft retail sales, and distressed corporate debt may indicate a crumbling foundation where subprime auto loans would likely be the first to crash.



  1. From March through September 2015, over $110 billion in auto loans were originated to borrowers with credit scores under 660. Approximately 64% of these below prime originationswent to borrowers with credit scores under 620. Below-prime (FICO 660) borrowers as a percentage of total auto loans increased from 20% in 2010 to 38.7% in 2014. The average subprime auto loan term is 71 months, a year longer than a prime auto loan, and the average subprime auto loan-to-value ratio is 125%. To put the size of the subprime auto loan market into perspective, subprime mortgages outstanding in 2007 were just four times the volume of subprime auto loans outstanding today ($250 billion.)
  2. Regulators have begun scrutinizing subprime finance companies as more publications warn of a subprime auto loan bubble. Recently, a current SC employee who has been working in finance for 15 years claimed the lender indeed had been breaking several regulations. Other bubble concerns and weaknesses could be working in tandem with auto loan risk, including regional real estate bubbles, commercial real estate bubbles, poor retail sales, the student loan bubble, and a soaring number of distressed corporate bonds. In mid-2015, a Reddit blogger amassed a litany of posts by subprime borrowers struggling to make their payments, one of which documented a $12.00/hour worker approved for a $37,000 auto loan.
  3. When auto loans are bundled into collateralized debt obligations (CDOs), higher quality loans “tend to be” separated from lower quality loans, depending on the program. Therefore auto CDOs could be better priced according to risk, unlike the mortgage CDOs of the mid-2000s. Other recent data shows that super-prime auto loans have been leading auto loan growth; hence some assume subprime is not out of control. Subprime loans have accounted for 19.3% of all auto loans in 2015, up only slightly from 18.1% in 2011. Auto loan delinquencies in Q3 2015 were less than Q3 2014. Credit bureaus Equifax and Transunion are bullish on auto loans and predict flat delinquency rates for 2016 as long as economic conditions stay healthy.
  4. Blueshift Research’s September 14 Used Auto Financing report found that the used auto financing industry was at or near its peak and only an adverse economic environment would lead to a downturn in this market. Sources claimed large dealers and captive lenders would suffer the most in a downturn. Used inventories were seen rising slightly and all dealer sources claimed initiatives enacted by the Consumer Financial Protection Bureau would materially help the industry.


Are subprime auto loans actually in a bubble? Will this bubble soon pop? Are other weak economic indicators the beginning of a new downturn, and if so, will subprime auto loans be the first to break? To gain insight into the subprime auto loan market, Blueshift will gather data and issue a market research report from independent sources in the following areas: Used car dealership executives, auto finance companies, auto repossession companies, and industry specialists.


Companies: Credit Acceptance Corp (CACC), Santander Consumer USA Holdings (SC), Ally Financial (ALLY), Springleaf Holdings (LEAF), Lithia Motors (LAD), America’s Car-Mart (CRMT), ACE Limited (ACE), AutoNation (AN), Capital One Financial Corporation (COF), Sonic Automotive (SAH), Penske Automotive Group (PAG), Group 1 Automotive (GPI), CarMax (KMX)