No other quarter symbolized the challenges the industry faced last year than the third quarter 2008, as the impact of slumping sales, unavailable financing and increased delinquencies revealed the dynamic shift that’s taken place in automotive finance.


Revealed during the quarter were clear shifts in loan originations among the lending tiers, increased delinquencies and changes in lending policies. This month’s year-over-year comparison also revealed the emergence of credit unions, which was the only segment to increase its share in the automotive finance industry.


Distribution of Automotive Loans by Lending Tier



The number of open automotive loans decreased throughout 2008. In the third quarter alone there were slightly more than 63.9 million open automotive loans, a year-over-year decrease of 3.1 percent.


When compared to the third quarter 2007, the prime market experienced the most significant reduction in volume. While there are still more than 35.7 million (55.98 percent) automotive loans that fall within the prime market, the segment experienced a year-over-year reduction of 4.27 percent from the third quarter 2007.

The subprime market also shrunk in year-over-year comparisons. With more than 9.4 million accounts considered subprime, this sector decreased 1.69 percent from the third quarter 2007.


In contrast, both the nonprime and the below subprime segments realized year-over-year growth. The most significant increase was seen in the nonprime segment, which grew 17.74 percent to reach more than 9.9 million open automotive loans. The below subprime

segment grew 3.02 percent to reach more than 8.7 million open automotive loans.


Distribution of Automotive Loans by Segment



Share of open automotive loans among the automotive lenders also experienced marked

shifts during the quarter, with credit unions being the exception. Year over year, credit unions increased their market share by 4.34 percent, as they captured 22 percent of all automotive loans.


Within the credit union segment, loans falling into the prime tier shrunk 5.70 percent year over year, while the nonprime segment grew 18.02 percent.


Banks realized a 1.71 percent decrease in their market share, bringing their share of open automotive loans to 27.9 percent in the third quarter. Banks also experienced the largest decrease in the percentage (6.11 percent) of loans falling into the prime segment, as the segment holds the largest percentage of prime loans at 66.64 percent.


Captive lenders remained fl at 30 percent market share for the quarter. Like credit unions and banks, captive lenders also realized a decrease in their prime segment (4.72 percent), resulting in 61.65 percent of all open captive loans falling into the prime segment.


The largest reduction in year-over-year share was seen in the finance segment, which experienced a 1.93 percent reduction in overall market share. It’s share for the quarter was 20.1 percent of all open automotive loans.


Finance companies also experienced shifts within their portfolio. Unlike the other segments, which saw a decrease in the percentage of loans falling in the prime risk segment finance companies increased the percentage of prime loans and nonprime loans by 7.56 percent and 20.20 percent, respectively. Year-over-year, finance companies experienced a decrease in both the subprime and below subprime tiers of 7.15 percent and 7.75 percent, respectively.



Financing – 3rd Quarter Originations



The third quarter saw a $511 reduction in the average amount financed, bringing the average amount financed on automotive loans originated in the quarter to $18,520. Average monthly payments on these loans were also reduced by $21.51, resulting in an average monthly payment of $373.65.


With the exception of the below subprime market, all other risk tiers realized a decrease in the average amount financed decreased. The most significant dollar decrease was in the subprime segment, which saw a reduction of $979, bringing the average amount financed in the quarter to $16,677. Monthly payments also fell for the subprime segment to $368.54 — a reduction of $21 monthly. Similarly, the nonprime segment also experienced a decrease of $940, resulting in an average of $17,732 financed. Monthly payments also dropped for the tier to $362.83, a $20 reduction.


Consumers falling into the prime segment financed the largest amount at $19,529. However, this was still $753 less than the prior year. Despite having the lowest dollar decrease in amount financed, the prime segment experienced the largest dollar decrease in average monthly payment ($26), bringing the payment to $378.14 per month.


While the lower-risk segments decreased the average amount financed, the below subprime group increased its average amount financed by $485. This resulted in an average amount of $15,924 financed per loan in the third quarter. Like the other risk segments, the below subprime group also experienced a decrease in monthly payments of $3, bringing the tier’s average payment to $374.48 a month, the second highest payment among the segments.


Average Term



For the first time since 2005, the average term for loan originations fell below 60 months to 59.61 months, a decrease of 0.55 months from the year-ago period.


With the exception of the below subprime segment, all lending tiers experienced a decrease in the average term for loans originated during the quarter. The largest decrease was in the subprime segment, which fell by 2.08 months to 59.03 months.


Nonprime automotive loans had the longest average loan term at 60.65 months (down -0.80 months). Prime loans fell by 0.33 months to 59.78 months.


The only sector to experience an increase in term was the below subprime space. While still financed at the shortest loan term of 56.81 months, the segment’s terms increased by a slight 0.06 months when compared to the year-ago quarter.



60 Days Past Due Delinquency Rate



Perhaps the most significant data points regularly tracked and scrutinized by lenders is the delinquency rate. Increases in delinquency significantly impact the lending programs available to dealers. At the end of the quarter, 0.89 percent of all open automotive loans were 60 days delinquent, an increase of 12.7 percent from the third quarter 2007. The total amount of these delinquent loans was more than $7 billion.


Finance companies, which have portfolios made up of mostly high-risk consumers, experienced the largest increase in delinquency. By the end of the quarter, 2.15 percent of loans originated by finance companies were 60 days delinquent. This was a 66.7 percent increase from the previous year. With the highest industry delinquency rate, finance companies also had more than $3.3 billion at risk — the largest amount among all tiers.


While having the lowest delinquency rates, credit unions experienced the second highest rate increase. By the end of the third quarter, 0.45 percent of all open credit union loans were 60 days delinquent — an increase of 25.1 percent. The total amount of these delinquent loans was $689 million, the lowest amount among the finance segments.


Automotive loans held by banks experienced an 18.6 percent increase in 60-day delinquency rates. With 0.58 percent of all bank loans delinquent, that represented more than $1.3 billion at risk.


Finally, the captive market experienced the lowest increase in delinquency at 9.6 percent, bringing its 60- day delinquency rate to 0.66 percent for all open captive loans. Captive lenders also had the second highest dollar balance at risk with more than $1.7 billion automotive loans 60 days delinquent at the end of the quarter.


Changes in Programs to Continue


The changes seen throughout the automotive finance market in 2008 were more clearly realized in the third quarter. Shifts in loan originations among the lending tiers, increased delinquencies and changes in lending policies reflected real challenges in consumer financing.


As lenders continue to adjust their lending programs, there has been a steady increase in the number of automotive loans originated in the prime space. However, as those loans age, the number of open prime loans has continued to decrease. In other words, while loans are being originated prime, they aren’t staying prime.


Increases in delinquency rates will continue to impact overall lending programs. These increases will cause lenders to continually reevaluate their programs, which could mean further challenges ahead for high-risk consumers to obtain automotive loans.


For dealers looking to maintain in today’s unsteady environment, it’s critical to gain a thorough understanding as to how these trends and challenges are playing out in their specific markets. By arming themselves with a complete understanding of what’s being financed and in which risk tiers, dealers can better adjust their strategies in order to gain the right financing for themselves and their customers.


Melinda Zabritski is the director of automotive credit for Experian Automotive. She can be reached at [email protected]