Increasing incentives have drawn more new car buyers to take out loans through automakers’ financing companies, which is forcing third party lenders to offer riskier loans. OEM financing options now make up 50% of all new car loans, and lenders not associated with an automaker are offering more subprime loans (to borrowers with lower credit scores) and used car loans than they have in the past.
Subprime lending on used cars that might lose their value drastically sounds a lot like what caused the banking and automotive collapses in 2008, but banks are comfortable with subprime loans on used cars. Tom Wolfe, the executive vice president of consumer credit solutions at Wells Fargo, which is the largest U.S. used car lender, told Reuters that a customers who finance used cars so that they can get to work are good credit risks. Wells Fargo is also in a partnership with General Motors to provide incentivized financing through GM dealers and Wolfe added that the company gives three times as many used car loans as new ones.