The auto finance market continued to thaw in the third quarter, particularly for the below-prime credit segments. Consumers deserve much of the credit, because more on-time payments have led to declines in repossessions, charge-off and delinquency rates.

For the quarter ending in September, subprime originations grew by 8 percent, marking the first increase for the high-risk credit segment since 2007. Even terms are beginning to stretch out again for the below-prime tiers, with the deep subprime category claiming the longest average term for new-vehicle financing and the largest increase in term for used financing during the quarter.

Repossessions fell by 5 percent during the period, while the average charge-off amount dropped by $2,252. The most promising sign was the drop in the percentage of auto loans 30 days past due, which fell below the 3 percent mark for the first time since 2007. Additionally, the total balance of 30-day delinquent loans dropped by $4.5 billion.

The following analysis will provide a more detailed picture of how far the auto finance market has come since the credit crisis took hold two years ago and a snapshot of consumer activity in the third quarter.

Risk Distribution Still Geared Toward Prime

The overall risk distribution between the credit tiers has remained stable over the last several years, with more loans falling into the low-risk prime and superprime segments. However, outstanding dollar balances during the quarter were down $38 billion from the year-ago period, with banks and captive lenders experiencing the largest decreases — $15 billion and $13 billion, respectively. Credit unions and finance companies decreased their outstanding balances by $6 billion and $4 billion, respectively.

On a quarterly basis, the percentage of consumers who fell into the combined low-risk tiers, prime and superprime, increased by 0.2 percent, inching up from 62.6 percent of all open automotive loans to 62.8 percent in the third quarter. Compared to the year-ago quarter, the outstanding balance for both low-risk categories increased by 3.12 percent and 3.05 percent, respectively.

The percentage of open automotive loans falling into the deep subprime category experienced a slight quarter-over-quarter drop, declining from 13.3 percent of all open auto loans in the second quarter to 12.9 percent in the third. The decrease was more significant on a year-over-year basis, with the percentage of open automotive loans in the highest risk tier falling by 14.27 percent. Subprime stayed flat at 8.8 percent on a quarterly basis, but its percentage inched up by .02 percent from the year-ago quarter. Nonprime grew slightly from 15.3 percent to 15.5 percent. On a year-over-year basis, the credit tier’s percentage of open automotive loans increased by 1.67 percent. 

60-Day Delinquencies Continue to Fall

For the second consecutive quarter, year-over-year delinquency rates decreased as consumers continued to do a better job of repaying their loans. Sixty-day delinquencies fell 17.4 percent from the third quarter 2009 to 0.77 percent. The total dollar balance of 60-day delinquent loans fell by 32.1 percent, or $1.9 billion, to $4.077 billion.

More importantly, the decrease in 60-day delinquent loans was realized by all lending sources, with banks and captives leading the way. On a year-over-year basis, banks experienced a 22.74 percent decrease. Credit unions realized a 16.32 percent decrease, while credit unions, captives and finance companies touted decreases of 16.31 percent, 19.99 percent and 12.20 percent, respectively.

Finance companies held the highest balance in 60-day delinquent loans at $1.4 billion, which was down $388 million from the year-ago quarter. Credit unions touted a 60-day delinquent balance of $509 million, $169 million less than the third quarter 2009. Banks experienced the largest drop in the balance of 60-day delinquent loans, which fell $833 million from the year-ago quarter. Captives realized a decrease of $539 million.[PAGEBREAK]

Credit Scores Remain Elevated

Although credit scores during the third quarter registered a slight decrease for both new and used vehicles compared to the year-ago quarter, they remain elevated from what was seen before the third quarter 2008 — the last quarter before the credit crisis took hold.

Average scores on new-vehicle loans fell six points on a year-over-year basis to 769 — still seven points higher than the 762 score seen on new-vehicle loans originated in the third quarter 2008. Credit scores for used financing fell one point to 683 on a year-over-year basis, which was still 13 points higher than the average score registered in the third quarter 2008.

The still-elevated levels in credit scores means the auto finance market remains restrictive, with about 63 percent of loans originated during the third quarter going to consumers with prime credit. Still, the 4.1 percent drop in prime originations and the 8 percent increase in subprime originations is a clear signal that the market continues to settle into pre-credit crisis patterns.

Lenders Softening Stance on Risk

Access to credit has been one of the biggest challenges for dealers attempting to secure financing for their credit-challenged customers. The situation improved slightly in the third quarter, with the share of new vehicles financed to nonprime, subprime and deep subprime customers increasing by 12.7 percent.

Although new-vehicle loans made to customers with prime and superprime credit during the quarter accounted for 80.94 percent of all new-vehicle loans, the nonprime, subprime and deep subprime tiers all registered market share gains. The share of loans to nonprime customers rose from 9.79 percent to 10.86 percent, while the share of loans made to subprime customers increased from 5.66 percent to 6.61 percent. Deep subprime’s share increased from 1.46 percent to 1.59 percent.

On the used side, 51.98 percent of loans went to customers with superprime or prime credit in the third quarter. The share of used-vehicle loans made to customers with below-prime credit scores rose by 2.69 percent to 48.02 percent. Loans made to nonprime and subprime customers grew by 6.2 percent and 10 percent, respectively, while deep subprime fell by 5.5 percent.

Average Amount Financed Rises

The $2,530 year-over-year jump in the average amount financed seems unaccountable until one considers the effect of Cash for Clunkers. The rebate program had a dramatic impact on how much lenders were willing to finance in the third quarter 2009. The market conditions during the year-ago quarter must also be taken into account when considering the $977 increase in used financing.

Looking at third quarter data from two years ago, the average amount financed registered at around $24,000, an approximate $1,200 difference from the average allowance in the third quarter 2010. On the used side, the average amount financed in the third quarter 2008 stood at $15,983, a $723 difference from the third quarter 2010.

Looking at year-over-year data, the greatest amount financed among new vehicles was for the prime risk tier ($26,579), while the nonprime risk segment realized the greatest year-over-year increase of $2,830.

The average amount financed for used vehicles increased across all risk segments, with the prime tier experiencing the greatest year-over-year increase ($1,130). The superprime risk tier claimed the highest amount financed, resulting in an average amount financed of $18,044 per vehicle.[PAGEBREAK]

Rates Dip Across the Board

Another positive sign for car shoppers during the third quarter was the year-over-year drop in interest rates, which fell 79 basis points for new and 34 basis points for used. The only rate increase was seen in used financing’s two highest risk tiers.

Looking at new-vehicle financing, superprime customers benefited from the lowest interest rate of 3.94 percent, a decrease from the 4.8 percent rate offered in the year-ago quarter. Even the deep subprime category realized a year-over-year decrease in interest rates, which dropped from 14.02 percent in the year-ago quarter to 13.54 percent.

On the used side, rates for deep subprime and subprime increased 156 basis points to 17.81 percent and 45 basis points to 14.71 percent, respectively. Rates for nonprime registered at 10.18 percent, a decrease of 48 basis points. The average rate for prime and superprime stood at 7.44 percent and 5.49 percent, a decrease of 89 and 105 basis points, respectively.

Market Healing Despite Restrictions

The automotive finance market showed a marked improvement in the third quarter, as a higher percentage of loans were written for credit-challenged customers. Interest rates were down and delinquencies continued to fall, all of which point to a much healthier lending environment.

Despite the positive signs, the automotive finance industry remains restrictive compared to 2007 and 2008, when loans were much more readily available for customers in all risk tiers. However, the pendulum seems to be swinging back toward a more robust lending environment.

Melinda Zabritski serves as director of automotive credit for Experian Automotive. E-mail here at [email protected].