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2Q Analysis: Below-Prime Goes Prime Time

In the second quarter, finance sources continued their drive down into the high-risk credit tiers and consumers continued to pay on time. But the magazine’s resident finance insider wonders how long those trends can continue in this month’s review of quarterly auto finance trends.

October 2011, F&I and Showroom - Feature

by Melinda Zabritski

A few bumps in the road may have slowed the economic recovery, but that wasn’t the case for auto finance, especially in the second quarter. Dealers were able to find more sources for their credit-challenged customers, with Experian Automotive’s quarterly auto finance data showing a significant increase in loans made to below-prime car buyers.

That segment represented 22.29 percent of all new-vehicle loans originated during the second quarter, an 18.21 percent increase from the year-ago period. This was welcome news to both dealers and manufacturers, especially with half of all potential consumers falling into the high-risk credit tiers.

For their part, consumers continued to improve their loan repayment patterns, and their good behavior is driving the push into the high-risk credit tiers on the part of finance sources. That pattern also is driving down delinquencies, repossessions and dollar volumes of at-risk loans. The uptick in average loan amounts for new ($17) and used ($476) vehicles also served as an indicator of the auto finance industry’s improving health and appetite.

Delinquencies Continue to Fall

As previously mentioned, consumers continued to make their payments on time and gave finance sources every reason to delve deeper into the lower credit tiers. The 30-day delinquency rate, for instance, declined by 10.39 percent in the second quarter, falling from 2.89 percent to 2.59 percent of all open automotive loans. Additionally, the 60-day delinquency rate fell by 14.46 percent, with finance companies experiencing the largest rate decline.

The decreases in the 30- and 60-day delinquency rate led to a nearly 20 percent decline in overall dollar volume of at-risk loans, which fell from $21 billion a year ago to $16.9 billion in the second quarter.

Below Prime in the Fast Lane

The most positive sign for dealers was the 22.4 percent year-over-year jump in new-vehicle loans made to credit-challenged customers. That increase shouldn’t be a surprise, given the improvements in delinquencies and dollar volumes of at-risk loans.

Breaking down the high-risk segment, the share of auto loans made to nonprime customers rose from 10.57 percent a year ago to 11.99 percent. The share of loans for subprime customers rose from 6.16 percent in the year-ago quarter to 8.17 percent. The biggest jump in share was made by the deep subprime category, which rose 44.1
percent year over year to 2.13 percent.

Loans made to the below-prime risk tiers also jumped in the used segment, increasing by 7.7 percent year over year. Overall, 52.7 percent of used-vehicle loans were made to nonprime, subprime or deep subprime car buyers, up from 48.93 percent in the year-ago quarter.

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