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Below-Prime Financing Continues to Thaw, Reports Experian Automotive

December 07, 2010

Auto finance sources continued to loosen their standards in the third quarter, particularly for those with less-than-stellar credit, Experian Automotive reported today.

Subprime originations increased 8 percent in the quarter, the first increase for the credit segment since 2007. Additionally, market share for loans made to nonprime, subprime and deep subprime vehicle shoppers experienced a 12.7 percent year-over-year increase.

What’s driving this loosening, said Melinda Zabritski, director of automotive credit at Experian Automotive, are better payment patterns on the part of consumers.

For the first time since 2007, the 30-day delinquency rate fell below 3 percent, clocking in at 2.99 percent, with the total dollar balance of 30-day delinquent loans dropping by $4.5 billion.

The percentage of loans 60 days delinquent dropped 17.39 percent from the year-ago quarter, while the total dollar balance for 60-day delinquent loans fell by $1.9 billion. Additionally, repossession rates were down 5 percent, while the average charge-off amount fell by $2,252.

“We’re seeing very strong improvements in those dollars tied to 60-day delinquent loans,” Zabritski said.

A bulk of the loans originated in the third quarter — about 63 percent — were made to conusmers with prime credit, but that was down 4.1 percent from the year-ago quarter. Zabritski attributed the decrease to the market settling into more normal patterns, pointing out that prime originations accounted for slightly more than 50 percent of the loans originated before the recession took hold.

Another sign that credit is loosening are the upticks in the average amount financed, which increased for new and used by $2,530 and $977, respectively. The prime segment experienced the biggest increase in the average amount financed for new financing, jumping by $2,875 from the year-ago period. On the used side, however, subprime experienced the largest increase, jumping by $1,132.

Loan terms, which were restricted throughout all of 2009, are also loosening, albeit by one month for both new and used. Deep subprime claimed the longest term for new financing at 68.68 months. The credit segment also experienced the largest increase in term on the used side, climbing from 46.95 months to 50.39 months.

And although average credit scores were down 6 points for new and 1 point for used, Zabritski noted that scores are still 13 points higher than they were three years ago – a sign that the auto finance market still remains restrictive.

Banks led the way in market share in the third quarter, accounting for 35.97 percent of the market, followed by captives at 27.58 percent and credit unions at 19.49 percent. Zabritski pointed to the 8 percent year-over-year increase in share among captives as a sign that the market is coming back, but said the 30.51 percent increase in share among financing companies — which typically take on more risk — was an even better sign of things to come for the below-prime segment. Market share for finance companies in the third quarter stood at 8.6 percent.

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