GM Increases Subprime Lending

GM Increases Subprime Lending

One of President Obama’s supposed strengths heading into this year’selection is his decision to bail out automakers, in particular GeneralMotors. GM made record profits in 2011, though that success has slumped a bit in 2012. A story published Friday in Investors Business Daily suggests part of GM growth can be attributed to increased use of subprime auto loans.

As with home financing, a potential car buyer’s credit score is rated on a scale between 300 and 850.In 2010, GM bought “subprime specialist” Americredit and renamed it GMFinancial. GM Financial provides more than 8 percent of loans offered byGM. And of those, 93 percent are to buyers with credit scores below 660,the cutoff between prime and subprime.

Not only is government-owned GM making more subprime loans than before, the loans it is making are increasingly going to those with worse credit scores. IBD notes “From Q4 2010 to Q1 2012, GM Financial loans to customers with the worstFICO scores — below 540 — shot up 79% to more than $2.3 billion.”

A GM spokesman says credit losses “have not risen above 5.5% since late2010.” However, that would certainly change if the country was to enteranother recession. As we learned in 2008, risky loans don’t appear to bea problem when the market is growing. It’s only when the music stopsthat risky investments becomes losses. Given that the taxpayers stillown 500 million shares of GM, this is a risk that concerns all of us.

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