Abstract
We utilize the data of a very large UK automobile loan firm to study the interaction of the characteristics of borrowers and loans in predicting the subsequent loan performance. Our broader findings confirm the earlier research on the issue of subprime auto loans. More importantly, unmarried borrowers living with furnished tenancy agreements who have relatively new jobs have a probability of defaulting of more than 60% compared to an average 7% default rate in overall subprime borrowers in the dataset. Also, in the above category are those who live in a less prosperous part of the UK such as the north-west, are full-time self-employed, have other large loan arrears, fall into the bottom 25% percentile of monthly income, secure loans with high loan to total value (LTV), purchase expensive automobiles with shorter loan duration payment plans, and have a high dependency on government support. This in fact is also true of those who go into arrears, except that the highest probability in this context is around 40% compared to 6% for an overall sample. These findings shall help in the understanding of subprime auto loans performance in relation to borrowers and loan features alongside helping auto finance firms improve predictive models and decision-making.
Highlights
The subprime market is mostly made up of subprime mortgage loans, as well as some specialist lenders including payday loans
Ioannidou et al (2009) believed the world financial crisis may have been caused by ab increased default rate on subprime mortgage loans which led to a virtual shutdown of interbank credit markets and a series of dramatic interventions by all major credit banks
By extending the analysis of (Ghulam and Hill 2017) on subprime auto loan performance, this study looks into the role of borrowers’ demographic, residential, and employment characteristics alongside loans and securitized asset features in assessing the risk of subprime loans going into arrears and defaults as well as write and early payoffs
Summary
The subprime market is mostly made up of subprime mortgage loans, as well as some specialist lenders including payday loans. The study examines the interactions of borrower demographics, characteristics of the loan and securitized assets, and the role of other loans of the subprime borrower These interactions were excluded in the (Ghulam and Hill 2017) and this paper seeks to give a broader and more conclusive picture of the borrowers’ probabilities of who were more likely to be in arrears, or would completely default. These appear to be the ones who are married, homeowners, full-time employed, and based in South of England with zero other loans arrears These borrowers happen to be high income earners (falling under the top 10% category, with bottom 10% LTV, and car price with longer duration loans alongside job stability and less dependency on state financial benefits to supplement their low income). These include the variables pertaining to borrower demographic, loan characteristics, and securitized assets and other loans apart from the present loan being analyzed
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