“Bad Borrower” Trend Could Mean Bad News for Auto Lenders Without Collateral Protection

More “bad borrowers” are getting car loans in the US: 27 percent of car loans for new vehicles this year went to borrowers with credit scores of less than 500, the highest percentage since tracking began in 2007.

Although delinquencies and charge-offs are still at near-record lows, the increase in loans to bad borrowers threatens that trend, particularly when paired with the increase in loan term length. Today, non-prime loans are averaging 70 months, and the amount of money borrowed in auto loans also keeps rising.

With longer loan terms and higher loan amounts, borrowers are more likely to be “upside-down” from an equity standpoint, making it more tempting for them to walk away from a loan if they have trouble with payment or if the vehicle is damaged. Unfortunately, one in three repossessed vehicles will have unrepaired damage, making collateral protection insurance (CPI) more important than ever.