There is no doubt that the automotive finance market is facing dynamic challenges in 2008. Vehicle sales are down, delinquencies are increasing, lending criteria continues to tighten, and lenders leaving the market have left a vacuum that has created a tumultuous lending environment for all.
This month’s quarterly consumer automotive finance report, which analyzes year-over-year trends for the second quarter of 2008, illustrates the continued shifting of credit quality into the higher risk tiers and the increases in consumer delinquency. These increases demonstrate why lenders continue to re-evaluate their programs, and are making it more difficult for high-risk consumers to obtain financing.
Distribution of Automotive Loans by Lending Tier
Despite the decrease in sales this year, there has been a slight year-over-year uptick of 2.1 percent in the number of open automotive loans. However, reviewing the credit quality of those loans also reveals that the number of higher risk loans continues to grow. By the end of the second quarter 2008, the number of open automotive loans outside of the prime market increased 15.08 percent from the same period in 2007.
The only risk tier that did not experience growth was the prime market. While there are still more than 36.4 million (56.52 percent) automotive loans that fall within the prime market, this group experienced a significant year-over-year reduction of 9.2 percent from the second quarter of 2007.
By contrast, the below subprime market realized the most significant increase, growing 28.6 percent to reach 13.41 percent of all open automotive loans. This segment continues to grow and now represents more than 8.6 million automotive loans.
Distribution of Automotive Loans by Segment
As with prior quarters, the market share among the automotive lenders continues to see definite shift s. The segment with the most activity was finance companies. This is not entirely surprising when considering this segment traditionally lends to higher risk consumers, which is the tier that experienced the largest growth in the quarter. By the end of the second quarter, finance companies represented 20.27 percent of all open automotive loans — an increase of 23 percent.
Captive lenders experienced a slight decrease in the number of open automotive loans, declining 2 percent to represent 30 percent of all open automotive loans. However, when reviewing only those loans opened within the second quarter of 2008, the captive lenders represented 25.2 percent of lending.
Year-over-year market share among the banks fell by 10 percent to reach 28.2 percent of open automotive loans. Though this appears to be a significant decrease in share, the overall share of the market for banks has remained relatively flat for the previous four quarters. Similarly, credit unions’ market share has experienced only minor shift s of 1 to 2 percent over the last several quarters.
Breaking Down Second Quarter Originations
There has been very little change in the amount financed for the market overall. By the end of the second quarter, the average amount financed was $18,946; an increase of only $44 from the second quarter of 2007. This change had little impact on the average monthly payment. Across all lenders and risk tiers, the average monthly payment for loans originating in the second quarter was $389.34.
The average amount financed in the prime market actually increased $8.00 to $20,271 for loans originating during the quarter. Monthly payments also increased by a mere $2.01 to reach $397.90 for prime loans. Both the nonprime and subprime markets experienced decreases in the average amount financed for loans originating in the second quarter.
The nonprime market financed an average of $18,161, which was $379 less than the previous year. Consumers in the subprime space financed $16,896 on average — $351 less than the previous year. The average monthly payments for these consumers also decreased $5.13 for nonprime loans, and $5.50 for subprime loans.
Consumers in the below subprime tier were unlike all other segments, experiencing an 8 percent, or $1,205, increase in the average amount financed, bringing the average loan amount to $15,931. The average monthly payments for these consumers also increased $7 to $380.39 from the year-ago period.
Average Term Decreases
The average term for loans originated in the second quarter of 2008 decreased to 60.2 months. The average term peaked at 60.73 months in the first quarter of 2007, and hit a low of 60.16 months in the third quarter of 2007.
With the exception of the high-risk, below subprime consumers, all lending tiers experienced a decrease in the average term for loans originated in the second quarter 2008. Consumer automotive loans in the prime space were financed at an average of 60.46 months — a decrease of 0.16 months.
The average term for nonprime consumer automotive loans stood at 61.21 months, down 0.7 months. The most significant decrease in term was seen in the subprime tier. The average term for these loans dropped 1.75 months to 59.72 months for loans originated in the second quarter 2008.
The only sector to experience an increase in term was the high-risk, below subprime space. The average loan term is now at 57.39 months, an increase of 0.66 months.
60-Day Delinquency Rate Increases
Of utmost importance in today’s market are delinquency rates, as they significantly impact the lending programs available to lenders. At the end of the second quarter, 0.75 percent of all open automotive loans were 60 days delinquent — an increase of 11.9 percent from the year-ago quarter. The total amount of delinquent loans was more
than $5.9 billion.
Credit unions, whose portfolios are made up of mostly prime consumers, experienced the largest increase in delinquency. By the end of second quarter, 0.38 percent of all credit union loans were 60 days delinquent. This is a 22 percent increase from the previous year. And while their delinquency rate is the lowest in the industry, there is over $578 million at risk for this market.
Captive lenders experienced the second highest increase in delinquency rates. By the end of the second quarter, 0.59 percent of all open captive loans were 60 days delinquent, an increase of 18 percent. Captives also traditionally finance larger amounts than the other lenders, with the current amount of these delinquent loans totaling more than $1.5 billion.
Automotive loans held by banks experienced a 9.3 percent increase in 60-day delinquency rates, with 0.47 percent of all bank loans delinquent. This put more than $1 billion at risk.
Finally, while finance companies have the highest delinquency rate of 1.78 percent, the category experienced just a 6.6 percent increase in 60-day delinquencies from the same period a year ago. Despite this, the high delinquency rate experienced by the finance companies poses the largest amount of risk, representing more than $2.7 billion in delinquent automotive loans by the end of the second quarter 2008.
Changes to Continue
The second quarter presented many challenges for automotive lenders. Having the biggest impact on lending strategies was the shift in credit quality to higher risk tiers and the increases in consumer delinquencies. And as lenders respond by adjusting their lending programs, there has been a steady increase in the number of loans originated in the prime tier. However, as these loans age, the number of open prime loans continues to decrease. In short, while loans are being originated as prime, they aren’t staying prime.
Having a firm understanding of how these activities influence today’s lending environment is critical for dealers, allowing them to better assess their current financing opportunities and make the right judgments in positioning their business for future success.
Melinda Zabritski is the director of automotive credit for Experian Automotive. She can be reached at [email protected] bobit.com.