Jonathan Gregory explained why the latest reading of the Dealertrack Credit Availability Index had a notable connection to the subprime space — beyond the fact that the February figure signified the highest level of auto credit access since December 2022.

The index came in at 95.9, representing a 3.0% lift year-over-year.

The senior manager on Cox Automotive’s economic and industry insights team gave context in analysis that accompanied the latest index update.

“For consumers, the improved access to auto credit is a positive development, particularly for those with lower credit scores,” Gregory wrote. “However, the higher yield spreads and down payment requirements mean that borrowing costs may be higher.

“For lenders, the increased subprime share and longer loan terms indicate a willingness to take on more risk,” he continued. “However, the higher yield spreads and down payment requirements suggest that lenders are also taking steps to mitigate this risk. Lenders will need to balance their risk appetite with prudent lending practices to ensure the stability of their loan portfolios.”

Gregory noted that the subprime share of loans — representing contracts given to applicants with lower credit scores — increased by 150 basis points in February. He reiterated that the movement likely triggered debates that probably have been going on inside of finance companies for decades.

“The increase in subprime lending can be seen as a double-edged sword: while it expands access to credit for consumers with lower credit scores, it also introduces higher risk into the lending portfolio,” Gregory wrote. “This significant rise suggests lenders are more willing to extend credit to higher-risk borrowers.”

When it comes to yield spreads, Gregory recapped that the five-year U.S. Treasury decreased by 14 basis points in February, leading to a larger yield spread.

He mentioned that yield spreads expanded by 50 basis points, making auto-finance rates more favorable compared to bond yields.

According to Cox Automotive tracking, the average rate for financing booked in February decreased by 36 basis points from January

“Higher yield spreads indicate higher costs for borrowers, which could be a response to the increased risk associated with a higher subprime share. This trend suggests that lenders are willing to take on more risk,” Gregory wrote.

Elsewhere in Cox Automotive’s data, Gregory indicated the share of contracts with terms longer than 72 months jumped by 50 basis points in February. It again showed the conundrum some consumers face, especially ones with softer credit.

“Longer loan terms can make monthly payments more affordable for consumers, but they also result in higher overall interest costs over the life of the loan,” Gregory said. “The increase in longer-term loans may indicate that consumers are seeking ways to manage their monthly expenses, even if it means paying more interest over time.”

Going counter to stretching terms is higher down payments, which rose 10 basis points on a sequential comparison in February, according to Cox Automotive data.

“Higher down payments can reduce the loan amount and the risk for lenders, but they can also pose a challenge for consumers who may not have sufficient savings,” Gregory said. “The slight increase in down payment requirements suggests that lenders are taking a cautious approach to mitigate risk.”

One other notable trend in the latest update was negative equity.

Cox Automotive data showed the share of contracts booked in February that included negative equity spiked by 110 basis points in February.

“This rise is an important indicator of financial stress among borrowers,” Gregory said. “Higher negative equity share can lead to increased default rates, as borrowers may struggle to keep up with payments on loans that exceed the value of their assets.”

Gregory also mentioned that overall, captives showed the most credit tightening, while auto-focused finance companies demonstrated the most credit loosening in February.

Bottom line: Helping to create that lift in credit availability was Cox Automotive data indicating the contact approval rate in February ticked up 10 basis points.

“This slight increase indicates that more consumers could secure auto loans, reflecting a marginally more favorable lending environment. Higher approval rates can be attributed to lenders’ confidence in the economic outlook and consumers’ ability to repay loans,” Gregory said.

“Overall, the February Dealertrack Credit Availability Index saw notable improvements in auto credit availability, reflecting both lender behavior and broader economic conditions,” he added.