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2019-03-05 7 Million Americans are 3 Months Delinquent on Car Payments! What Is The Answer?

7 Million Americans are 3 Months Delinquent on Car Payments! What Is The Answer?


By Kenneth Shilson

President, Subprime Analytics


On February 12, The Washington Post featured an article that announced, “A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve of New York reported, even more than during the wake of the financial crisis.” The New York Fed also said “that there were over a million more ‘troubled borrowers’ at the end of 2018 than in 2010 when unemployment hit 10% and the auto delinquency rate peaked.”

Many of the borrowers who are behind on these bills have low credit scores (i.e., subprime customers) and are under age 30 per the Fed report. Many auto loan borrowers have stronger credit scores but defaults have been high among “subprime” borrowers with credit scores under 620, the New York Fed reported.

The article further stated, “fewer than 1% of auto loans issued by credit unions are 90 or more days late, compared to 6.5% of loans issued by finance companies (but additional losses should be anticipated as these loans mature). Therefore, the author of the Washington Post article suggested the “No. 1 piece of advice is not to get your financing from a car dealership! Shop separately for the vehicle and the financing. Go to a credit union or community bank to get a low-cost loan.”

Although the aforementioned recommendation may seem logical, it ignores reality!

First, it is not the type of originator that causes defaults; it is poor underwriting which was done at origination. That is, a proper matching of the customer with a vehicle they can afford was not done at time of sale!

Second, deep subprime customers historically are “unbankable” due to poor credit scores (under 520) so buy here, pay here and other independent dealers have been their only financing alternative. These dealers not only sell the vehicle but offer service and repair financing “sidenotes” when vehicles encounter mechanical problems. In summary, they provide a “transportation solution” to customers with limited financial capacity who can’t afford significant repair bills. Without these dealers, millions of Americans would be unable to purchase necessary transportation for work and personal use. These dealers are a lender of last resort!

Last year I wrote a five part series of articles entitled, “Keeping Them Sold.” Copies are available free of charge on my website at

In my first article, I mentioned that auto bond securitizations brokered to investors by Wall Street fueled the high level of subprime auto finance competition during the last 3 years. I further indicated that the business models used in these securitizations differed from those used by the independent car dealers that I surveyed during the same period, as follows:



Business Model Comparison

2017 Deep Subprime per Experian Automotive Report

2017 Independent BHPH Benchmarks







Amount Financed





Used Loan Term

55 Months

44 Months

11 Months


Used Monthly Payment





Average Finance Rate






            Understanding the differences in underwriting, their impact on collections and recoveries, risk management, and cash flow was the focus of these articles.

            Cheap money and the investor’s quest for higher yields fueled the demand for subprime auto bond securitizations.  These securitizations were comprised of pools of loans with differing credit quality – prime, near prime, subprime, and deep subprime. In some cases, the deep subprime component was 33% of the overall pool, according to Morgan Stanley in March 2017.  The inclusion of deep subprime bonds in these pools increased the overall yield. Unfortunately, it also greatly increased the risk of default (as unhappy investors have subsequently learned).

            In fairness, several of the poor performing securitizations were done by issuers who had very limited experience with subprime auto finance originations and collections.  They accessed the market when demand was greater than supply, and filled the need!  Investors were attracted by potential yields which were greater than other investment opportunities in a low yielding environment.

As indicated by the table above, the bond terms were 55 months or greater, and began with larger amounts financed.  This was necessary because the collateral for many of these deep subprime bonds were either new or CPO vehicles!  Therefore, the original terms were lengthened to make the monthly payments “more affordable” to the borrowers.  Investors derived comfort from the higher collateral values at origination.  Independent buy here, pay here dealers who had previously dominated the “unbankable customer” market preferred shorter terms, approximately one year less.

            As auto loan defaults increase and convert into charge-offs (2019 may be a record year for these) some important lessons should be learned, as follows:

1.)    Good underwriting requires the proper matching of the customer with a vehicle they can afford. Starting with newer, more expensive vehicles does not assure repayment of the related financing.

2.)    Lengthening the loan term increases the repayment risk of subprime loans because “longer terms remain outstanding longer and are exposed to adverse changes in borrowers’ credit conditions”, per Standard & Poor’s. Major repairs are likely during longer loan terms which subprime customers can’t afford.

3.)    Increased sales prices and related amounts financed only benefit when they are collectible. Otherwise, they are just “paper profit”.

4.)    The high rate of competition in subprime auto finance during the last 3 years, allowed subprime customers to default on loans and subsequently get financing on another vehicle. The significant number of auto bond securitizations demanded greater market penetration and aggressive underwriting.

The good news is that many capital providers have now shifted their emphasis to higher credit quality prime and near prime customers creating a great opportunity for independent car dealers to regain lost market share. Subprime customers with recent defaults on their credit history will find dealer financing to be their best and perhaps only alternative!


Kenneth Shilson is President of Subprime Analytics ( which provides computerized subprime auto portfolio analysis using proprietary data mining technology.  To date, the company has analyzed over 2 million subprime auto deals aggregating $22 billion.  The company provides portfolio analysis, profit and cash flow enhancement and other consulting services to operators and capital providers nationwide.  Mr. Shilson is the President and Founder of NABD, which merged with NIADA on Jan. 1, 2018.  A copy of the latest subprime benchmarks report can be obtained by emailing him at or by calling 832-767-4759.