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Market on the Move

The auto finance industry broke new ground in several reporting categories in the first quarter. But not all records are meant to be broken.

July 2014, F&I and Showroom - Feature

by Melinda Zabritski

Breaking records isn’t always a good thing. Such was the case with the auto finance market, which set new records for average monthly payment, loan term and leasing penetration in the first quarter 2014.  

The good news for dealers is the auto finance market remained strong, with overall loan volumes rising significantly and delinquencies remaining in check. Finance sources also demonstrated some discipline, with subprime dollar volumes falling from a year ago. The following report provides a recap of the key trends from the first quarter 2014.

Setting New Records
In 2014’s opening quarter, total dollar volume for automotive loans increased 11.6%, or $84 billion, from a year ago to $811.3 billion — the highest total for automotive loans since 2006. And all lending segments shared in the increase, with banks increasing their total by $33 billion from a year ago. Credit unions, finance companies and captives increased their total dollar volumes by $23 billion, $19 billion and $9 billion, respectively.

Term lengths for new-vehicle loans also reached a new milestone, stretching one month from a year ago to the highest average since 2006 at 66 months. Leasing also set a new record, with 30.22% of all vehicles financed in the first quarter being leases. That’s up from 27.5% in the year-ago quarter. Of all new vehicles financed, leasing held a share of 27.5%, up from 22.94% in the year-ago period.

The records set for loan length and leasing penetration were most likely driven by consumers attempting to offset the rise in average amounts financed. In the first quarter, the average grew from $26,648 one year ago to $27,612. Also rising during the period, however, was the average monthly payment, which grew from $459 in the year-ago quarter to a record $474.

But as has been the case in previous quarters, consumers had no problem accessing credit. For new-vehicle loans, the average credit score dropped from 722 in last year’s opening quarter to 714. For leases, the average score fell from 731 one year ago to 721. For used vehicles, average credit scores increased slightly from 637 in the year-ago quarter to 641.

Delinquencies Drop Nationwide
Also good news was the decline in delinquency rate. In the first quarter, 30-day delinquencies accounted for 2.24% of all open automotive loans, down from 2.36% in the year-ago quarter and the lowest level since 2006. And all lending segments posted declines in their 30-day delinquency rate, with banks decreasing their rate 7.1% to 1.93% of all open automotive loans. The rate for captive finance companies dropped 3.9% to 2.23%, while credit unions and finance companies lowered their 30-day delinquency rates by 2.3% and 5.3%, respectively, to 1.2% and 4.62%.

Sixty-day delinquencies all fell during the quarter, inching down from 0.65% in the year-ago period to 0.63% of all open automotive loans. The only segment to experience an increase was credit unions, which saw their rate increase 4.4% from a year ago to 0.32% of all open automotive loans.

All other lending segments experienced decreases in 60-day delinquencies, with the rate for banks falling 5.5% from a year ago to 0.55%. Captives and finance companies also realized declines of 1.4% and 2%, respectively, in 60-day delinquencies, with their rates landing at 0.43% and 1.64% of all open automotive loans.

Despite the drop nationwide, 22 states showed increases in delinquency rates. Leading the way was Delaware, which saw its 60-day delinquency rate increase from 0.73% one year ago to 0.81% in the first quarter. As for the 30-day delinquencies, only six states showed rate increases. Leading the way was Alaska, which saw its rate rise from 1.48% one year ago to 1.61%.

Repossession Jump, Subprime Financing Declines
Repossessions were up significantly in the first quarter, growing 36.5% from a year ago to 0.68%. However, the increase was driven entirely by finance companies, which tend to focus on credit-challenged customers. In the first quarter, the repossession rate for the segment jumped 69.1% to 3.01%.

All other lending segments realized drops in repossessions, with the rate for banks dropping from 0.26% one year ago to 0.24%. The rate for credit unions fell from 0.16% in the year-ago quarter to 0.15%, while the repossession rate for captives dropped from 0.38% to 0.35%.

And as previously noted, finance sources did demonstrate discipline during the quarter, with subprime dollar volumes dropping. In fact, in the first quarter, nonprime, subprime and deep-subprime loans accounted for 64.2% of all loans financed, down 2.6% from a year ago. For new-vehicle financing, however, the share of nonprime, subprime and deep-subprime automotive loans rose slightly from 33.68% o to 34.34%.

Alarming Records
As previously stated, not all records are meant to be broken. And in the case of auto finance, not all milestones reached in the first quarter were positive. The drop in delinquencies was a good sign, as was the rise in total dollar volume. Both metrics point to a stable market and a willingness among finance sources to put money into the economy.

What wasn’t a good sign were the lengthening of terms, and the increases in the average amount financed and monthly payment. And the longer terms stretch, the more likely consumers will be upside down when they return to the market. The situation could eventually lead to higher losses on delinquent loans, something the market needs to avoid.

As we continue moving through 2014, keep an eye on loan terms and delinquencies. The delicate balance between these two metrics will continue to be key indicators of the auto finance industry’s health.

Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at melinda.zabritski@bobit.com.

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