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The auto finance industry is surging after a third quarter in which all lending segments increased their originations for the high-risk tiers.

January 2012, F&I and Showroom - Feature

by Melinda Zabritski

Auto finance sources went on the offensive during the third quarter, with loans made to credit-challenged customers representing just less than a quarter of new-vehicle loans during the period. And all signs point to auto lenders continuing to loosen their guidelines as consumers look to replace their aging vehicles.

Fueling their confidence were car buyers, who continued to do a better job of paying their loans. The ongoing drop in 30- and 60-day delinquencies continued to help drive down the total volume of at-risk loan amounts by nearly $3 billion. Also putting finance sources in a better mood was the fact that many of those risky 2007 and 2008 originations began coming off the books during the quarter.

Industry observers might be nervous about higher volumes of loans made to high-risk car buyers, but the right level of managed risk would allow dealers to open up potential sales to a larger pool of customers. And as noted by finance executives during a panel discussion at the magazine’s annual conference in September, there is a higher concentration of subprime customers entering dealerships. Some insiders estimate that about 40 to 50 percent of potential car buyers still fall into the subprime category.

Delinquencies Continue to Fall

Delinquency rates continue to serve as the bellwether of the industry’s health — the more they fall, the better the news is for lenders and dealers. And during the third quarter of 2011, 30-day delinquencies dropped 7.05 percent year over year to 2.78 percent, while 60-day delinquencies dropped 7.4 percent to 0.71 percent.

Those declines led to a $2.99 billion year-over-year drop in dollar volumes of at-risk loans, which stood at $18.159 billion in the third quarter. Another positive sign was the 6.4 percent year-over-year drop in repossession rates, which sat at 0.62 percent at the end of the quarter.

Appetite for Risk Increasing

Lenders responded to improved repayment patterns, repossession rates and at-risk dollar volumes by taking on more risk during the reporting period, with all three below-prime tiers — nonprime, subprime and deep subprime — representing 21.87 percent of all new-vehicle loans originated during the quarter, a 14.8 percent increase from the year-ago period.

The two highest risk segments realized the largest percentage increases in share. Deep subprime’s share jumped 17.3 percent, while subprime’s share increased by 17.8 percent. The share of nonprime, new-vehicle loans originated during the quarter increased by 12.5 percent.

The increases in share among the high-risk tiers weren’t limited to one lending segment either. Banks increased their nonprime, subprime and deep-subprime originations by 20.8 percent, while captives, credit unions and finance companies increased their below-prime originations by 7.94, 5.25 and 2.98 percent, respectively.

Also confirming the increased appetite for risk among finance sources was the quarterly drop in average credit score for both new- and used-vehicle loans. For new-vehicle financing, the average credit score fell from 769 in the year-ago quarter to 763, while the average score for used-vehicle loans dropped from 683 a year ago to 676 in the third quarter.


  1. 1. Nil [ March 15, 2012 @ 09:38AM ]

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