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Nothing to Fear

Delinquencies remained in check despite total outstanding auto loan balances rising to an all-time high, signaling a healthy automotive credit climate.

July 2015, F&I and Showroom - Feature

by Melinda Zabritski

Perhaps it’s time for the folks closely monitoring the automotive credit market to channel their inner Franklin Delano Roosevelt. After all, President Roosevelt’s stirring words during his 1933 inaugural address — “The only thing we have to fear is fear itself” — certainly do apply to today’s automotive credit climate.

It is true that the total volume of subprime financing is growing, that we’re seeing high total dollar volumes and that loans are getting more expensive and have higher monthly payments. Looking at those trends alone might raise some concern, but fear not, as the underlying fundamentals of the auto finance market remain strong.

Yes, total loan volume is up, but portfolios are well-balanced with a relatively low percentage of subprime and deep-subprime financing. Consumers also continue to do a good job of making timely payments. In short, there’s really nothing to fear when looking at the key trends from 2015’s opening quarter.

Delinquencies Drop
Delinquencies serve as critical barometers of automotive credit health, and both 30- and 60-day delinquencies realized slight decreases during the first quarter. Thirty-day delinquencies were down 4.1% from a year ago, while 60-day delinquencies dropped 3.2% over the same time period. Overall, just 2.1% of consumers were 30 days delinquent on their auto loans, while just 0.6% were 60 days delinquent.

The Bubble Myth
Talk of a subprime auto finance bubble just won’t go away, with many industry observers and some prominent media outlets continuing to claim that growth in subprime and deep-subprime auto financing has reached dangerous levels. However, this danger appears to be more like Bigfoot or the Loch Ness Monster — more myth than reality.

See, the percentage of automotive loans that fell within the subprime and deep-subprime risk categories accounted for 19.7% of the auto finance market in the first quarter, the lowest combined share since 2012. Subprime loans comprised 16.2% of the market, while deep-subprime loans accounted for 3.5%.

So while the volume of subprime loans was up in the first quarter, it was also up for all other risk categories. In fact, the volume of loans made to consumers with super-prime credit was up 8.5%, the highest year-over-year growth among all risk tiers. Also keep in mind that the percentage of subprime loans makes up a relatively small portion of the market.

New Record Highs
Reaching record highs in the first quarter were the average amount financed and the average monthly payment for a new vehicle. The average new-vehicle amount financed increased from $27,612 in the year-ago quarter to $28,711, while the average new-vehicle monthly payment increased from $474 in the first quarter 2014 to $488 in the first quarter 2015. Both trends helped drive up total outstanding loan balances 11.3% from a year ago to a record high of $905 billion.

The two trends also pushed payment-conscience shoppers to seek out ways to make their payments more manageable, which is why leasing picked up market share during the first quarter and loan terms continued to stretch.

Leasing accounted for 31.4% of all new vehicles financed during the first quarter, a 3.9% increase from a year ago. Consumers also took advantage of lower monthly lease payments, which fell from $412 in the year-ago quarter to $405. Leases were also easier to obtain, as the average credit score for a new-vehicle lessee fell from 721 in the year-ago period to 718 in the first quarter.

As for loan terms, they stretched to record lengths during the quarter, with terms for both new and used vehicles jumping one month to 67 and 62 months, respectively. Additionally, loans with terms between 73 and 84 months accounted for a record-setting 29.5% of all new vehicles financed, an 18.6% increase from the first quarter 2014. For used vehicles, the share of loans with terms between 73 and 84 months grew from 12% in the year-ago period to 16% — also the highest level on record.

No Bad News
Keep in mind, stretching terms do not necessarily represent an ominous sign for the market. Most long-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need. The one downside of stretching terms is if consumers become upside down on their vehicles, as too many people owing too much money could send the market in a negative direction.

In the first quarter, however, the automotive finance industry was firing on all cylinders, but it’s imperative for lenders to keep a close eye on the trends moving forward. Doing so will not only allow them to mitigate the level of risk to their portfolios, it will allow them to capitalize on opportunities and adapt to the growing needs of the marketplace.

With that said, the market’s continued success hinges on both consumers and lenders. As long as consumers keep making their payments on time and auto sales keep growing, FDR’s Depression-era mantra will continue to ring true for the auto finance market.

Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at melinda.zabritski@bobit.com.

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