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Delinquencies Keeping Auto Finance in Slow Lane

October 2009, F&I and Showroom - Feature

by Melinda Zabritski

The challenging economic times continued to take their toll on the automotive finance world during the second quarter, with rising delinquencies causing lenders to further tighten criteria. And although financing was still available across all credit tiers, car buyers continued to be pushed out of new-vehicle lots and into the used market.

Most notable during the second quarter was the rise in 30- and 60-day delinquencies, with this year’s rates severely outpacing last year’s rates. Combined, 30- and 60-day delinquencies accounted for $25.5 billion in at-risk loans. The news, however, wasn’t all bad.

With the average loan length dropping, and with consumers financing larger amounts than the first half of 2008, there were signs that consumer confidence and auto finance were on the rebound. Still, the following analysis will reveal just how unpredictable the market remains.

Middle Tiers Outpacing Consumer Population

First, let’s look at the automotive loan market by lending tier in the second quarter, which will not only shed some light on the credit quality of all open automotive loans held by U.S. consumers, but also on the current behavior of automotive lenders. Based on the ongoing changes in the automotive credit markets, let’s examine the market in five risk segments: superprime (740+), prime (680-739), nonprime (620-679), subprime (550-619) and deep subprime (<550).

On a year-over-year basis, the percentage of consumers who are classified in the superprime risk segment decreased 8 percent, resulting in 37.1 percent of all open automotive loans falling in this lowest risk tier. Combined, the prime and superprime market represented 61 percent of all automotive loans during the period, down from 63.7 percent last year (a 4.3-percent decrease).

The middle-ground nonprime and subprime segments represented 24 percent of consumers with an automotive loan, up 5.8 percent from last year. However, this risk segment is growing at a faster pace than the overall consumer population. For the entire U.S. credit population, 19.4 percent of all consumers fell into the combined nonprime and subprime segment, which is up only 1.04 percent from the previous year.

Banks See Big Increases in 60-Day Delinquencies

Increases in the delinquency rate are one of the leading causes of consumer credit shifts. It is also one of the most significant data points on which lenders focus. As lenders experience increasing loses due to delinquency, the availability and details of lender programs may change, impacting the credit programs available to dealers.

Automotive delinquency tends to increase on a cyclical basis, starting in the first quarter at the lowest point of the year and steadily increasing throughout the year. This year is no different. However, the quarterly rate of increase for 60-day delinquent loans slowed down compared to last year. Between the first and second quarters 2008, the 60-day delinquency rate increased 3.86 percent. The rate increased this year by 2.56 percent.

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