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Auto Finance Data Reveals Affordability Concerns

Fourth-quarter loan balances reached an all-time high for the third year in a row, but records broken for amounts financed and monthly payments raise affordability concerns.

April 2018, F&I and Showroom - Feature

by Melinda Zabritski

Photo via Getty Images. 
Photo via Getty Images. 

It’s been nearly a decade since the start of the Great Recession. In that time, the auto finance market has shown consistent growth. But there are concerns, although none are related to persistent chatter about a forming subprime auto finance bubble.

In fact, automotive loan balances reached a new record high in 2017’s end-of-year quarter, with finance sources continuing to adjust their risk levels and consumers doing their part by making on-time payments.

The concern, however, for the auto finance arena, as well as the auto industry as a whole, is affordability, with amounts financed and monthly payments for both new- and used-vehicle financing reaching new highs.

Still, the market remains strong and finance sources continue to gravitate toward the lower risk credit tiers. The following is a look at some of the trends that shaped the auto finance industry in the fourth quarter of 2017.

Record High, Slowing Growth

In the fourth quarter, loan balances reached a record $1.129 trillion, up from $1.072 trillion in the year-ago period. However, period’s 5.31% year-over-year growth in balances was slightly off-pace from the previous two fourth quarters.

Photo via Getty Images.
Photo via Getty Images.

Between the fourth quarters of 2015 and 2016, loan balances grew 8.59%. During the period between the fourth quarters of 2014 and 2015, balances grew 11.47%. It’s worth noting that balances reached record highs during those two periods. However, it’s also clear that the pace of growth is slowing.

By segment, credit unions saw the highest growth, both in terms of total dollar volume and percentage growth. The segment’s open auto loan balances jumped 12.9% from the year-ago period to $313 billion. That $36 billion increase was more than banks ($4 billion), captives ($7 billion), and finance companies ($10 billion) combined.

Subprime Pullback Continues

Since the second quarter of 2016 — when talk of a forming subprime auto finance bubble began to emerge through media reports — finance sources have been pulling back from the high-risk credit tiers. The trend continued in 2017’s end-of-year quarter.

According to the data, overall risk distribution for subprime and deep-subprime balances fell from 20.39% in the year-ago quarter to 19.88%.

In terms of total balance growth, superprime and prime grew by 7.85% and 6.25%, respectively, while nonprime and subprime balances exhibited modest growth of 3.72% and 3.39%, respectively. Total balances for deep subprime contracted by 0.29%, as lenders shied away from the most credit-challenged customers.

Q4 2017 by the Numbers:

  • The average amount financed for a new vehicle increased $509 to a record $31,099, while the average for used increased $317 to $19,589.
  • The average monthly payment for a new vehicle rose $8 to a record $515, while the average payment for used rose $8 to a record $371.
  • The average credit score for new-vehicle financing rose two points from a year ago to 716, while the average for used increased two points to 656.
  • Leasing’s share of all new vehicles financed during the fourth quarter ticked down from 28.94% in the prior-year period to 28.28%.

The upward shift was borne out in the average credit scores for all car buyers. For those purchasing new vehicles, the average score rose two points from a year ago to 716. Broken out by lease and new financing, average scores rose two points to 722 and 713, respectively. On the used side, the average credit score also increased two points to 656.

Record Loan Amounts, Monthly Payments

As previously mentioned, affordability is a major concern for the auto industry. In the fourth quarter, the continued rise in vehicle prices caused the average amount financed to surge by $509 from the prior-year period to a record $31,099. The average amount financed for used also reached a record high, climbing by $317 from the fourth quarter of 2016 to $19,589.

These shifts also caused the gap between new- and used-vehicle finance amounts to reach a record high of $11,510.

Even payments for leasing, which consumers typically turn to for payment relief, were on the rise, with the average increasing $17 from the year-ago period to $430. The increase might explain why leasing’s share of all new vehicles financed during the fourth quarter ticked down from 28.94% in 2016’s end-of-year quarter to 28.28%.And as finance amounts rose, so did monthly payments, which reached the highest levels on record. According to fourth-quarter data, the average monthly payment for new-vehicle financing rose $8 from the prior-year period to an all-time high of $515, while the average used-vehicle payment also rose $8 to a new high of $371.

Car buyers, however, were able to get some relief thanks to longer loan terms, which continued to dominate the market. However, fourth-quarter data did reveal some stabilization in terms of how far finance sources were willing to go.

In the fourth quarter, the average term for new-vehicle financing rose one month from the prior-year period to 69 months, while the average term for used was flat at 64 months. What kept terms from stretching any further was the decrease in the percentage of auto loans in the 73- to 84-month term band, which decreased from 32.1% in the prior-year period to 30%.

However, the percentage of new-vehicle buyers who opted for terms in the 61- to 72-month range increased from 40.3% in the prior-year period to 44%. The stabilization in that 73- to 84-month band could be further evidence that finance sources are managing risk.

Photo via Getty Images. 
Photo via Getty Images. 

Auto Credit Growth Healthy, Sustainable

The auto finance industry has gone through unprecedented growth in the past several years. The glass-is-half-empty crowd seems to find ways to spin things to look like the industry is headed for certain doom. In reality, the growth is occurring at a healthy and sustainable rate across the board.

Finance sources are extending credit and terms that meet buyers’ financial needs, and consumers are doing their part by making timely payments. All in all, it’s a recipe for ongoing success. And given the industry’s conservative approach, the automotive finance market should be on solid footing for the foreseeable future.

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

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