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Watch for Debris

All signs pointed to a great fourth quarter, but there was some cause for concern — just not enough to keep cars from rolling over the curb.

April 2013, F&I and Showroom - Feature

by Melinda Zabritski

The end-of-year quarter was a good time to buy, as far as consumers were concerned. Interest rates remained low, loan terms stretched and the average monthly payments on new and used vehicles continued to fall as a result. But how long can that last?

There was some cause for concern in the fourth quarter 2012: The 60-day delinquency rate rose slightly. The good news is that the uptick put the rate nowhere near where it was three years ago. Even better, the automotive finance market continued to exhibit strength and stability. That’s the main reason interest rates, loan terms and average monthly payments remained attractive to car buyers.

The uptick in the 60-day delinquency rate, as well as the $462 rise in chargeoff amounts vs. the year-ago period, is something finance sources must continue to monitor. But overall, the auto lending market closed out 2012 on a high note and is primed for an active 2013.

Chink in the Armor
The fourth quarter marked the first time since 2009 that either the 30- or 60-day delinquency rate experienced a year-over-year increase. In this case, it was the 60-day rate, which rose from 0.72 percent in the year-ago quarter to 0.74 percent. Not only did the rate remain relatively low, it was well below the 0.94 percent mark realized during the fourth quarter 2009, one year after the market crashed.

The rate increase meant the total balance of 60-day delinquent loans also grew, rising from $3.48 billion in the fourth quarter 2011 to $3.93 billion at the end of 2012. From the standpoint of growth as a percentage of the total market, the share of 60-day delinquent loans jumped from 0.53 percent a year ago to 0.55 percent in the end-of-year quarter.

Despite the uptick in 60-day delinquencies, 30-day delinquencies experienced a slight decline, dropping from 2.79 percent in the year-ago quarter to 2.72 percent in the fourth quarter 2012. The rate also remained well below the rate posted in the fourth quarter 2009, which peaked at 3.3 percent.

Banks, captives and credit unions all saw slight drops in 30-day delinquencies. Finance companies, which typically serve credit-challenged customers, were the only lending segment to experience an increase in the 30-day delinquency rate, which rose from 5.35 percent in the fourth quarter 2011 to 5.61 percent.

Additionally, quarterly repossession rates fell 27.6 percent, dropping from 0.63 percent in the fourth quarter 2011 to 0.46 percent in the end-of-year quarter. In fact, all lending segments experienced a drop in their quarterly repossession rates, with finance companies realizing the sharpest decline (34.7 percent); the rate dropped from 2.47 percent in the year-ago quarter to 1.61 percent in the fourth quarter.

Payments Remain Attractive
The rise in the 60-day delinquency rate did little to curb the appetite of finance sources, making the fourth quarter an excellent time for consumers to obtain a loan and get a vehicle with an affordable payment. And consumers responded by taking out larger loans. The average loan amount for new vehicles rose by $272 from a year ago to $26,691. The average loan amount on used vehicles was $17,629 in the fourth quarter, up $239 from a year ago.

Interest rates were down, with the average dropping from 4.52 percent one year ago to 4.36 percent. The interest rate for a used-vehicle loan also dropped, falling from 8.67  percent one year ago to 8.48 percent in the end-of-year quarter.

Consumers also benefited from the stretching of loan terms. On new vehicles, terms jumped from 63 months one year ago to 65 months in the fourth quarter. In fact, according to the data, the 72- to 84-month range for new-vehicle loans was the fastest growing segment in the fourth quarter, increasing by 19.4 percent vs. the fourth quarter 2011. Loan terms for used vehicles remain flat at 60 months.

Lower interest rates and longer loan terms also conspired to lower monthly payments. The average monthly payment for a new vehicle dropped from $465 in the fourth quarter 2011 to $460 in the fourth quarter 2012. The average monthly payment for a used vehicle dropped from $349 a year ago to $348.

Credit Scores Fall
The drop in average credit scores for both new and used vehicles also points to the ease in which consumers were able to attain vehicle financing. For new-vehicle loans, the average score was 755, down six points from the year-ago quarter. For used-vehicle loans, the average consumer credit score dropped five points to 665.

Additionally, the total share of the below-prime market for all new-vehicle financing increased 9.7 percent from a year ago to 24.78 percent. For used, the share of below-prime financing increased 3.4 percent to 55.4 percent.

Buy-here, pay-here operations specializing in subprime credit customers showed strong market share growth, increasing their piece of the market by 4.3 percent from one year ago.

Proceed With Caution
There is no question that the improved credit market has been an important part of the revived auto industry. Access to credit helps to close more deals, and that’s good for consumers and car dealers.

However, it is important for the industry to keep a close eye on delinquencies. While fourth quarter 2012 delinquencies were still well below prerecession levels, any rise should be a cautionary reminder to the industry to maintain discipline. So, while the market remains strong and consumers have ample access to credit, it is likely that another quarter with higher delinquencies will lead lenders to tighten their standards.

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

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