PhotoFor the first time since 2012, lenders are making fewer subprime loans, according to a new report from TransUnion, one of the three credit reporting agencies.

Subprime loans are those made to consumers with lower credit scores and usually carry less-favorable terms than prime loans. In most cases they carry higher interest rates and may have other disadvantages.

The TransUnion report found 4.63 million consumers received a subprime auto loan or lease, personal loan, or credit card in the first quarter of this year. That compares to 4.89 million in the first quarter of 2016.

“Across product lines, we saw a decline in subprime originations at the beginning of 2017, and for the first time in a number of years we observed this for consecutive quarters,” said Ezra Becker, senior vice president of research and consulting for TransUnion.

Played a role in the financial crisis

Subprime mortgages played a major role in the financial crisis of 2008. Millions of consumers who could not really afford to buy a home were able to do so with subprime mortgages that had very low interest rates to start, but quickly rose to unaffordable levels. It created a wave of foreclosures that threatened to bring down the financial system.

“Immediately following the recession, many lenders pulled back on subprime originations to control delinquency, Becker said. "As the economy recovered, lenders loosened their underwriting standards and allowed more subprime consumers greater access to credit."

Now, says Becker, that trend may be changing. It's not clear, however, why it's happening. It could be a case of lenders turning down more consumers with challenged credit, or it could be a case of fewer consumers with low credit scores are attempting to borrow money.

Big drop in personal loans

The biggest decline can in subprime personal loan origination, which dropped 10.6% year-over-year. It was an abrupt reversal since, in the first quarter of 2016, subprime personal loans surged 11%.

There was also a nearly 9% drop in subprime auto loans, after that sector had propelled a recent growth in auto sales. Subprime credit card origination dropped by a much smaller amount, 1.8%.

Becker says a combination of factors may be discouraging subprime lending. After years of growth in subprime auto lending, he says lenders may be concerned about an uptick in auto loan delinquency.

For consumers, getting out of the subprime category will not only improve chances of loan approval, it will also gain more favorable loan terms. Heather Battison, vice president of consumer communications for TransUnion, advises consumers to focus on improving their credit. Paying your bills on time, she says, is a good place to start.


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