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Tracking the Subprime Retreat

Finance sources responded to the recent uptick in delinquencies by moving upstream in the first quarter, pushing subprime lending to a 10-year low.

July 2017, F&I and Showroom - Feature

by Melinda Zabritski

Auto loan balances grew 7.82% from the year-ago period to a record $1.083 trillion in the first quarter, marking the first time in four years balances grew by only single digits. So while steady, overall growth has slowed after robust gains in 2014 (11.6%), 2015 (11.33%), and 2016 (11.06%).

The biggest contributor to that slowdown was the apparent retreat by finance sources from the high-risk tiers, with subprime lending falling to a 10-year low. Also falling was the 30-day delinquency rate, a clear sign of the industry’s health.

And despite the subprime pullback, every finance segment registered year-over-year growth in their open automotive loan balances. Leading the way with growth of 15.39% were credit unions, followed by finance companies at 6.08%, banks at 6.06%, and captive finance companies at 3.77%. The following is a look at some of the trends that shaped the auto finance industry in 2017’s opening quarter.

Moving Upstream
One of the key indicators of the auto finance industry’s overall health is the level of delinquencies. And in the first quarter, the percentage of auto loans 30 days delinquent dropped from 2.1% in the year-ago quarter to 1.96%. Sixty-day delinquencies did rise, however, inching up from 0.61% to 0.67% in the first quarter.

The drop in the 30-day delinquency rate reflects an overall pullback from subprime lending. Like a pendulum, lending strategies tend to swing back and forth. When things are going well, finance sources tend to test the subprime waters to see how deep they can wade. When delinquencies rise, as they have in recent quarters, the industry swings back the other way toward more creditworthy borrowers.

Well, that pendulum definitely swung away from the high-risk tiers during the first quarter, with the total share of subprime and deep-subprime loans dropping from 26.48% in the year-ago quarter to a 10-year low of 24.1%. 

The result was a rise in average credit scores for both new- and used-vehicle financing. For the former, the average rose five points from a year ago to 717. 

In fact, credit standards have tightened so much that the only market-share gain on the new-vehicle side was in the superprime risk tier, which grew to 29.15% from 27.18% in the first quarter of 2016. All other risk tiers registered losses in market share, with prime falling from 45.05% in the year-ago period to 44.88%. Nonprime fell from 17.6% to 16.53%, and subprime’s share dropped from 9.52% to 8.79%.

Loan Amounts Reach New High
Despite the tightening of credit standards, the continued rise in vehicle pricing pushed average amounts financed for both new and used to record levels. For new, the average amount financed rose by $513 from the year-ago quarter to a new high of $30.534. For used, the average increased by $288 from a year ago to a record $19,126.

Vehicle prices also caused the average monthly payment for a new vehicle to rise from $504 in the year-ago quarter to a record $509. They’re also likely the reason 66.5% of all loans included terms of greater than 60 months.

In fact, new-vehicle loans of more than 84 months accounted for 1.3% of the market, marking the first time loans of this length accounted for more than 1%. 

Leasing, Used Financing Move Upstream
Leasing continued to be the go-to alternative for payment-conscious car buyers. Although down slightly from 31.11% in the year-ago quarter, leasing accounted for 31.06% of all new-vehicle financing in the first quarter.

However, leasing remains very much a prime option, with the average credit score for a new-vehicle lease rising six points from a year ago to 722. In fact, prime and superprime accounted for 77.39% of all leases, up from 74.91% in the year-ago quarter.

The used-vehicle market also experienced an upward shift in creditworthiness, with the prime and superprime risk tiers accounting for 47.4% of that market. That’s up from 43.99% in the year-ago quarter. The average credit score for used-vehicle financing also rose, increasing seven points from a year ago to 652.

The likely reason for the shift toward low-risk tiers is the ample supply of late-model used units. Vehicles leased over the past several years have returned to the market as ideal candidates for certified pre-owned (CPO) programs. That’s likely the reason for the slight increase in the average monthly payment for a used vehicle, which inched up by $1 from a year ago to $363. 

Another key indicator of the lease-to-CPO impact is the growth in share among captives in the used-vehicle financing space. The segment increased its share from 7.2% in the year-ago period to 8.3% in the first quarter.

Looking Ahead

So how far will finance sources take their scrutiny of subprime borrowers? That’s the biggest question in the auto finance industry. And with 30-day delinquencies trending down, the subprime retreat appears to have had its desired effect. 

Moving forward, one of the key factors to watch is the impact that pullback has on 60-day delinquencies. If both 30- and 60-day delinquencies trend down, how quickly will finance sources open the spigot on subprime loans? More importantly, how will automotive retailers react if sales drop due to tightening credit?

Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. Email her at

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