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Doors Open for Below-Prime Buyers

In the third quarter, subprime originations increased for the first time since the credit crisis. F&I’s auto finance analyst breaks down the results.

January 2011, F&I and Showroom - Feature

by Melinda Zabritski

The auto finance market continued to thaw in the third quarter, particularly for the below-prime credit segments. Consumers deserve much of the credit, because more on-time payments have led to declines in repossessions, charge-off and delinquency rates.

For the quarter ending in September, subprime originations grew by 8 percent, marking the first increase for the high-risk credit segment since 2007. Even terms are beginning to stretch out again for the below-prime tiers, with the deep subprime category claiming the longest average term for new-vehicle financing and the largest increase in term for used financing during the quarter.

Repossessions fell by 5 percent during the period, while the average charge-off amount dropped by $2,252. The most promising sign was the drop in the percentage of auto loans 30 days past due, which fell below the 3 percent mark for the first time since 2007. Additionally, the total balance of 30-day delinquent loans dropped by $4.5 billion.

The following analysis will provide a more detailed picture of how far the auto finance market has come since the credit crisis took hold two years ago and a snapshot of consumer activity in the third quarter.

Risk Distribution Still Geared Toward Prime

The overall risk distribution between the credit tiers has remained stable over the last several years, with more loans falling into the low-risk prime and superprime segments. However, outstanding dollar balances during the quarter were down $38 billion from the year-ago period, with banks and captive lenders experiencing the largest decreases — $15 billion and $13 billion, respectively. Credit unions and finance companies decreased their outstanding balances by $6 billion and $4 billion, respectively.

On a quarterly basis, the percentage of consumers who fell into the combined low-risk tiers, prime and superprime, increased by 0.2 percent, inching up from 62.6 percent of all open automotive loans to 62.8 percent in the third quarter. Compared to the year-ago quarter, the outstanding balance for both low-risk categories increased by 3.12 percent and 3.05 percent, respectively.

The percentage of open automotive loans falling into the deep subprime category experienced a slight quarter-over-quarter drop, declining from 13.3 percent of all open auto loans in the second quarter to 12.9 percent in the third. The decrease was more significant on a year-over-year basis, with the percentage of open automotive loans in the highest risk tier falling by 14.27 percent. Subprime stayed flat at 8.8 percent on a quarterly basis, but its percentage inched up by .02 percent from the year-ago quarter. Nonprime grew slightly from 15.3 percent to 15.5 percent. On a year-over-year basis, the credit tier’s percentage of open automotive loans increased by 1.67 percent. 

60-Day Delinquencies Continue to Fall

For the second consecutive quarter, year-over-year delinquency rates decreased as consumers continued to do a better job of repaying their loans. Sixty-day delinquencies fell 17.4 percent from the third quarter 2009 to 0.77 percent. The total dollar balance of 60-day delinquent loans fell by 32.1 percent, or $1.9 billion, to $4.077 billion.

More importantly, the decrease in 60-day delinquent loans was realized by all lending sources, with banks and captives leading the way. On a year-over-year basis, banks experienced a 22.74 percent decrease. Credit unions realized a 16.32 percent decrease, while credit unions, captives and finance companies touted decreases of 16.31 percent, 19.99 percent and 12.20 percent, respectively.

Finance companies held the highest balance in 60-day delinquent loans at $1.4 billion, which was down $388 million from the year-ago quarter. Credit unions touted a 60-day delinquent balance of $509 million, $169 million less than the third quarter 2009. Banks experienced the largest drop in the balance of 60-day delinquent loans, which fell $833 million from the year-ago quarter. Captives realized a decrease of $539 million.

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