Research on subprime mortgages has recently been gaining momentum, but subprime auto loans have largely been ignored. By using a unique data set of a very large UK vehicle finance company, this study analyses secured loans extended to the subprime borrowers with impaired or limited credit history. It looks specifically at characteristics in relation to payment history, in order to determine what characteristics make a good or bad borrower. We conclude that married and divorced borrowers as well as borrowers living in low unemployment and relatively prosperous regions such as the South East and London are less likely to default compared to not married, furnished tenants or borrowers living in the North West of the UK who have a high probability of default. Similar to the prime loans, income of borrowers and defaults propensities are negatively associated. Loan and security characteristics with the most impact on default status are price and age of the automobile, effective interest rate measured by APR, loan-to-value (LTV) and term of the loan agreement. The results of this study will help in understanding subprime auto loans and borrowers as well as helping lenders to distinguish between good and bad subprime borrowers.
|Number of pages||14|
|Journal||Review of Economics and Finance|
|Early online date||7 Dec 2017|
|Publication status||Early online - 7 Dec 2017|
- automobile loans
- credit risk