What exactly is subprime?
The Consumer Financial Protection Bureau (CFPB) divides borrowers into four tiers:
- Deep Subprime: credit scores below 540
- Subprime: credit scores between 540 and 619
- Nonprime: Credit scores between 620 and 679
- Prime: Credit scores of 680 and above
Vehicle costs have soared in the past two years, both new and used. Used car prices have gone up 20%, generally pricing those in the subprime and deep subprime tiers out of purchasing a new vehicle. As fewer consumers are able to purchase new cars, this pushes the prices on used cars up as well. Based on current trends, the increase in used car prices is double the increased amount for new cars, sitting at a 40% increase in 2022.
Research shows that 64% of consumers in the US live paycheck to paycheck. This research leads readings showing that across the US, a significant portion of the population fall within the subprime tier. The primary concern for subprime borrowers is their payment amounts rather than length of the loan. No matter what payment schedule, making sure the borrowers can comfortably make their payments is crucial. As vehicle prices soar, loan terms continue to rise to get payment amounts where they need to be.
Due to the rapidly changing lending market, the potential implications to deep subprime individuals may be significant. The CFPB assured they are focused on creating a fair, transparent, and competitive auto lending market by ensuring affordable credit for auto loans, monitoring practices in auto loan servicing and collections, and fostering competition among subprime lenders.