Optimism continues to spread throughout the auto finance industry as the market continues to show positive signs. Delinquencies are on the decline, consumer credit continues to stabilize and all signs point to more good news for the rest of the year. For the second straight quarter, delinquencies showed a year-over-year decrease, according to Experian Automotive’s second-quarter data. The quarter also saw a higher percentage of auto loans being made to nonprime and subprime customers, another indication that there could be light at the end of the tunnel — not just for auto finance, but for the economy as well.

Loan Distribution by Risk Tier

Throughout the last few years, overall distribution between the credit tiers has remained stable, with more loans falling into the low-risk prime and superprime segments. For this analysis, the four risk segments examined include: superprime (740+), prime (680-739), nonprime (620-679), subprime (550-619) and deep subprime (less than 550).

The percentage of consumers who fell into the two low-risk tiers — superprime and prime — increased 2.57 percent to 62.6 percent of all open automotive loans in the second quarter. In contrast, the high-risk subprime and deep subprime segments all experienced decreases.

Deep subprime experienced the greatest year-over-year decrease of 10.71 percent, with the segment now representing 13.3 percent of all automotive loans. Subprime dropped 0.95 percent, with the risk tier now representing 8.8 percent of all auto loans. The nonprime segment, however, experienced a slight increase of 0.78 percent, with the risk tier now accounting for 15.3 percent of all open automotive loans.

60-Day Delinquencies Continue to Fall

One of the more positive trends to emerge in the second quarter was the continued improvement in delinquency rates. The main reason for the year-over-year decrease in delinquencies is the shift in portfolios to a more prime-oriented position.

During the reporting period, the 60-day delinquency rate fell 11.85 percent to 0.71 percent of all open auto loans. The total dollar balance associated with delinquent loans decreased by 24.2 percent, bringing the total 60-day balance to a little more than $4 billion.

Benefiting the most from the improvement in delinquencies were banks, which experienced a 17.3 percent decrease in the 60-day delinquency rate. Credit unions, which held the lowest 60-day delinquency rate (0.37 percent) during the quarter, experienced a 14.01 percent year-over-year decrease. The rate for captive lenders dropped 5.99 percent to 0.58 percent. Finance companies, which claim the highest delinquency rate (1.79 percent), realized a decrease of 11.51 percent.

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Credit Scores Stabilizing

Credit scores also continued to stabilize in the second quarter, with scores for new financing loosening slightly. Scores for used financing, however, experienced a slight increase.

Average scores on new-vehicle loans fell two points on a year-over-year basis to 772. The average credit score for used-vehicle financing, which is more seasonal than new financing, was 679, an increase of two points from last year.

Looking at national numbers, the states with the highest average credit scores for consumers applying for new-vehicle loans were Minnesota (803), Wisconsin (796), Iowa (795) and Montana (789). States with the lowest average credit scores were Mississippi (749), Nevada (750), Louisiana (750), Texas (752) and North Carolina (759).

Auto Finance Continues to Loosen

Second-quarter data for new and used financing showed that lenders are beginning to test the waters with customers who have less-than-stellar credit. They have yet to loosen up their criteria to the levels seen three years ago, but there was an increase in the percentage of nonprime and subprime loans originated during the quarter.

The total percentage of vehicle loans financed in the prime and superprime segments increased slightly (0.8 percent). Those segments combined represented 62.76 percent of all financing. Growth also was seen in the high-risk tiers.

New-vehicle financing remains geared toward the low-risk tiers, with 81.79 percent of all originations falling into either the prime or superprime segment. For the first time in more than two years, however, the total prime market did show signs of loosening (0.8 percent), driven mainly by a 1 percent decrease in the superprime segment’s share of new financing. Prime increased slightly by 0.1 percent.

In the high-risk tiers, nonprime lending increased by 4.3 percent to 10.57 percent of new financing. Subprime increased 4.9 percent to 6.16 percent of new financing in the quarter. Deep subprime, however, continued to constrict, with the segment experiencing a 5.3 percent decrease. The drop resulted in only 1.48 percent of all new vehicles financed during the period falling into this high-risk segment.

There was a shift in the used-vehicle segment, which saw the divide between the low- and high-risk segments beginning to even out. The combined low-risk segments accounted for 51.07 percent of all used loans, a 0.36 percent increase from last year.

The combined high-risk segments experienced an overall decrease of 0.38 percent, driven largely by the 7.6 percent decrease in deep subprime financing. Used nonprime financing, however, increased 4.4 percent to 14.45 percent of financing. Subprime used financing increased 5.1 percent to 15.62 percent of financing.

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Average Amount Financed Increases

The average amount financed for a vehicle in the second quarter was $20,551, a year-over-year increase of $1,137. Both new and used segments experienced increases in the amount financed, with new financing increasing $883 to an average of $25,223. The amount financed in the used category increased $1,027, bringing the average amount financed to $16,581.

For new vehicles, the greatest amount financed was seen in the prime risk segment ($26,489), while the greatest year-over-year increase was seen in the nonprime segment, which jumped by $916. Even the deep subprime segment, which represents only a small portion of financing, experienced a $304 increase, bringing the average amount financed to $21,940.

The average amount financed for used vehicles increased across all risk segments, with the greatest increase ($1,184) occurring in the superprime segment, which climbed to an average amount financed of $18,036.

Terms Loosening

The second quarter showed a slight loosening of loan terms. Across all risk tiers, the average loan term for all financing was 60 months, an increase of one month. New-vehicle loan terms remained flat at 62 months, while used terms increased one month to 58 months.

Loan terms for new-vehicle financing increased slightly for deep subprime (up 0.46 months), subprime (up 0.16 months) and superprime (up 0.36 months). The longest terms were found in the higher risk segments, with subprime loans averaging 68.23 months in the second quarter.

Terms for used financing increased across all risk tiers. The most significant year-over-year increase in this segment was seen in the deep subprime category, which rose by 1.81 months to an average term of 49.11 months. 

Local Lenders Remain Critical

The auto finance marketplace continues to show signs of further stabilization and even growth during the second quarter, helped out by the drop in delinquencies and improved credit. More importantly, second-quarter results showed that the economy is on the mend. For dealers, the rise in market share in nonprime and subprime financing means lenders are beginning to open up once again.

The industry, however, remains extremely cautious. Average credit scores remain relatively high for both new- and used-vehicle loans, and new-vehicle financing remains the domain of prime and superprime customers. 

What’s clear is the market remains open to the low-risk credit customers, which means dealers will need to continue studying lenders in their local markets and learn which ones can fill the lending gap for their high-risk tiers. Still, there appears to be a glimmer of light at the end of this economic tunnel.

Melinda Zabritski is director of automotive credit for Experian Automotive. E-mail her at [email protected]

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