In finance, subprime lending means giving loans to individuals who may have difficulty obtaining traditional financing, sometimes because of setbacks like unemployment, divorce, medical emergencies, and other difficult situations
These loans, often referred to as near-prime, non-prime, and second-chance lending, have become more popular since the years of the financial crisis, but they do come with risks.
Despite that, however, major financial institutions are taking on more of these loans. This summer, Capital One has seen big increases in subprime loans.
A mere 36% of people are able to purchase a car outright, and the average borrower has approximately $18,000 in debt. Subprime leads and subprime auto leads are designed to match these customers to dealerships that will grant these kind of loans to customers, and it appears that Capital One is taking on increasing numbers of them.
During the second quarter of 2016, the earnings of Capital One Financial failed to meet expectations, which led to a decrease in their stock value.
The one area they did see increases in, however, was subprime loans.
Whether subprime auto finance leads or special finance auto leads are responsible for this is difficult to say, but the increasing numbers drew the attention of many financial experts.
Financial analysts at Edward Jones have been carefully monitoring Capital One’s earnings, paying specific attention to the default rates of their borrowers.
However, they aren’t the only ones paying close attention to the company’s recent financial moves.
In February 2015, the New York District Attorney’s Office and the Department of Justice both required the company to submit all information on these loans as part of an investigation looking at the subprime lending practices of large lenders. Fortunately for Capital One, the investigation didn’t result in any form of fines or charges levied against them.
Nearly 50% of all auto loans given by the company were subprime, as of March 31. Buyers with credit scores of 500 to 600 are considered subprime, which means that Capital One is currently servicing countless customers with poor credit scores.
Nationally, only about 23% of auto loans fall into this category. However, if more companies follow the lead of Capital One, that number may just see an increase.
All over the country, auto sales are rising fast. For people who need to buy a car but don’t have an ideal credit history, these subprime loans are a financial lifeline.