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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However, on a year-over-year basis, the rate of 60-day delinquent loans increased 21.2 percent, resulting in 0.80 percent of all automotive loans reported 60 days delinquent. In all, more than $5.2 billion in loans were at risk during the quarter, up from $359 million from last year.

The greatest increase in the 60-day delinquency rate was in the bank segment. Banks experienced a 29-percent increase, resulting in 0.78 percent of all bank-held automotive loans reported as 60 days delinquent. The segment also experienced the greatest dollar balance increase at more than $301 million. It also accounted for $1.8 billion dollars in at-risk automotive loans.

Captive lenders experienced a 24.9-percent increase in the 60-day delinquency rate, bringing their rate to 0.63 percent. However, due to the reduction in the number of automotive loans held by captive lenders (32-percent fewer open loans), the dollars at risk decreased $139 million, resulting in $1.3 billion in at-risk automotive loans held by captive lenders.

Credit Scores Continue to Increase

When we examine the characteristics of financing in the first half of 2009, the tightening of the credit markets is most evident in the increasing credit scores for both new- and used-vehicle financing. The average credit score for vehicles financed in the first half was 703, an increase of eight points.

New-vehicle financing experienced a 19-point increase in scores, resulting in an average credit score of 773. Used-vehicle financing did not tighten as much as new financing, but it did experience an increase of eight points, resulting in an average used-vehicle score of 668 in the first half.

Financing Shifts Toward Prime, Superprime

Along with higher credit scores, the overall distribution of vehicle financing shifted into the prime and super-prime risk segments. More than 59.9 percent of all financing in the first half of this year fell into these low-risk segments, up 7.2 percent from last year. The middle tiers, nonprime and subprime, shrunk a combined 15.6 percent, and represented 24.36 percent of all automotive loans originated from January to June.

An examination of new-vehicle originations by vehicle type further reveals the tightening of the credit markets, especially in the higher credit scores. According to the data, 82.21 percent of all new financing was in the prime and superprime segments, up 9.5 percent from last year. New-vehicle financing in the deep subprime segment dropped more than 46 percent, with only 1.62 percent of new-vehicle loans falling into this high-risk segment.

Meanwhile, financing in the used-vehicle market saw some increases in the combined prime and superprime segments (up 8.9 percent), with more than 51 percent of financing in the used-vehicle market falling outside of prime. And unlike new-vehicle financing, used financing increased by 2.1 percent in the deep subprime segment, resulting in 23 percent of all used-vehicle loans originated in the first half of the year scoring below 550.

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Spread Between New and Used Financing Increases

The difference in financing between new and used vehicles averaged around $9,200, with the greatest difference of $10,017 seen in the nonprime risk segment. This spread has increased over last year, with the average difference between new and used financing coming in at just under $8,000.

Overall, financing on new vehicles increased by $105 on a year-over-year basis, bringing the average amount financed in the first half to $24,265. Consumers in the prime risk segment financed the greatest amount on new vehicles at $25,561, an increase of only $57 from last year.

The average amount financed on used vehicles was $15,441, a decrease of $1,051 from last year. Among used-car loans, the greatest amount financed was $16,754 in the superprime segment, which was over $4,900 more than the average amount financed in the deep subprime risk segment.

Average Term Continues to Decrease

Across all risk tiers, the average loan term for the first half was 59 months, down two months from last year. Terms between new and used financing continues to be one of the bigger differentiators across risk tiers, with a more than 20-month gap between new and used financing in the deep subprime segment. While terms vary considerably by credit risk tiers, each risk group realized decreases in monthly terms, with used-vehicle financing experiencing the greatest reductions.

The shortest terms on new vehicles financed were found in the superprime risk segment, where the average term dropped 0.46 months to 60.6 months. The greatest decrease in terms for new-vehicle financing occurred in the deep subprime segment, which dropped by one month from last year to 67.5 months.

Used-vehicle financing experienced the most significant decreases in average terms. The deep subprime segment dropped 5.49 months to 47.5 months.

Credit Loosening Rides on Delinquency Rate

Noticeable and notable shifts continued to challenge the automotive finance market in 2009. While financing is still seen across all risk tiers, considerable changes — primarily based on vehicle type — have been made. Lenders continue to tighten their financing criteria as delinquency rates continue to increase.

If the shifts outlined in this analysis reveal anything, it’s that the changes in lending trends are unprecedented, and quite unpredictable. The used-vehicle market, for instance, appears to have been impacted more dramatically by loan characteristics, while new-vehicle financing constricted considerably, as seen with the shifts in lending toward consumers with higher credit scores.

These market changes will continue to present challenges to F&I managers, as lenders continue to evolve their finance programs based on these sometimes erratic market conditions. Having a firm understanding of these changes will be an F&I manager’s best chance at knowing how lenders are reacting to these trends and where they need to shift strategies to best work with those lenders that remain.

Melinda Zabritski is director of automotive credit for Experian Automotive. She can be reached at [email protected].

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