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In the Driver's Seat

The auto finance industry broke several records in the fourth quarter of 2015, with loan balances, new-vehicle finance amounts and monthly payments reaching new highs.

April 2016, F&I and Showroom - Feature

by Melinda Zabritski

Photo courtesy of iStock. 
Photo courtesy of iStock. 

The old sports adage that says rules were made to be broken certainly applies to the auto finance industry. In 2015’s end-of-year quarter, it raced past several key records.

Among the most noteworthy records to fall were outstanding auto loan balances, which climbed 11.5% from the prior-year period to $987 billion in the fourth quarter. This was the highest level on record since Experian began publicly tracking auto finance data in 2006.

Rising vehicle costs also pushed several key metrics to new highs. The average monthly payment for a new vehicle, for instance, rose to a record $493, while the average amount financed soared to a new high of $29,551.

While not at a record-breaking pace, subprime financing grew during the period as well. However, the market remains mostly prime, a sign that finance sources remain disciplined in their lending practices despite the records set during the period. The following is a look at some of the trends that shaped the automotive finance industry during the fourth quarter of 2015.

Record Drivers

The boost in sales contributed to a strong quarter for all lender types across the industry. But the growth in balances was primarily fueled by finance companies and credit unions, which increased their balances from the prior-year period by 22.5% to $166 billion and 15.9% to $241 billion, respectively.

Banks, however, continued to maintain the largest share of loan balances at approximately $337 billion, a 7.6% increase from the prior-year period. Captive finance companies experienced modest growth of 6.3%, with the segment’s fourth quarter balances totaling approximately $244 billion.

High-Risk Tiers Show Moderate Growth

Despite the increase in outstanding balances by finance companies — which typically specialize in subprime and deep-subprime auto loans — the high-risk tiers experienced only modest growth in market share in the fourth quarter. According to the data, the share of subprime and deep-subprime loans accounted for 16.8% and 4% during the period, compared to 16.6% and 3.8% in the year-ago period, respectively.

60-Day Delinquencies Rise

The metric the industry needs to keep an eye on are delinquencies. The 30-day delinquency rate did inch down from 2.62% in the year-ago period to 2.57%, but auto loans that are at least 60 days delinquent grew from 0.72% in the prior-year quarter to 0.77%.

And with the exception of credit unions, all lender types experienced increases in their percentage of loans 60 days delinquent. However, the percentage of loans 60 days delinquent during the period was still below the 0.8% rate recorded in the fourth quarter of 2007.

Additionally, of the $6.8 billion in loans 60 days delinquent, finance companies accounted for 45% of that share with a total dollar volume of $3.04 billion. Banks held the second highest share with a total dollar volume of $1.8 billion, followed by captives with $1.2 billion and credit unions with $737 million.

Given that loans to subprime and deep-subprime consumers increased, it’s natural to see a slight uptick in delinquencies. And while the growth in delinquencies was relatively modest, the industry still needs to continue monitoring this metric in the quarters ahead.

Payment Gap Reaches New High

The gap between new- and used-vehicle monthly payments reached a record $134 in the fourth quarter, with the average new-vehicle payment coming in at $493 and the averaged used-vehicle payment coming in at $359. What this stat could signal is that more consumers are opting to lease or are beginning to shift into the used-vehicle market.

As such, leasing accounted for a record 33.61% of all new vehicles financed in the fourth quarter, with the average lease payment coming in at $412. As for used, 45.48% of all used-vehicle loans went to customers with prime and super-prime credit — up from 45.10% in the fourth quarter 2014.

And if consumers weren’t leasing or stepping into the used-vehicle market, they were taking out loans with longer terms. In fact, loans with terms between 73 and 84 months grew by 12% to account for 29% of all new vehicles financed during the quarter. The percentage of used-vehicle loans with terms in that same band increased 10.8% from the year-ago period to 16.4%. But despite the growth in longer term loans, the average term for new and used vehicles held steady from a year ago at 67 and 63 months, respectively.

Credit Scores Flatten

Looking at credit scores, the overall average has flattened in recent years. For new vehicles, the average fell from 712 in the prior-year period to 711. And since peaking in 2009 at 736, the average score for new vehicles has dropped 25 points, or about four points each year for the past six years.

Average credit scores for used vehicles have also flattened since 2009, when the average score reached 657. In the fourth quarter of 2015, the average increased just one point to 649.

Will the Boom Continue?

Yes, people shop for vehicles largely based on the monthly payment. And with average dollar amounts for new-vehicle loans soaring, fourth-quarter data makes clear consumers — even those within the prime and super-prime risk categories — turned to leasing and used vehicles in greater numbers.

So what does this mean for the health of the industry? Well, the one certainty is that more records will fall in the quarters ahead, as consumers will find a way to make their monthly payments manageable. And as long as they are able to meet their loan obligations in a timely manner, the boom in vehicle sales should continue to have a positive impact on the overall industry.

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