Some industry insiders called the third quarter 2014 the best the industry has seen since 2006. And according to the National Automobile Dealers Association, not only did the industry post three straight months with a seasonally adjusted annual rate above 16 million units, it also posted a SAAR above the 17 million-unit mark in August — the first time in 2014. Fueling those sales was an active automotive finance industry, which financed 84.4% of all transactions during that period.
Despite the activity, the auto finance marketplace continued to exhibit stability while enjoying consistent growth. The period did see an uptick in delinquencies, which can be explained by the pick-up in subprime auto lending. But for the most part, auto finance remains very much a prime-dominated marketplace.
The quarter also saw rising transaction prices push the average loan amount to an all-time high. The trend also spurred a jump in leasing and loan terms, as consumers looked for ways to keep vehicles and their payments more affordable.
The market should remain stable as long as consumers continue to make payments on time and as long as finance sources keep a close eye on how delinquencies fluctuate on a year-over-year basis. The following is a recap of several key trends from the third quarter 2014.
In the third quarter, the percentage of auto loans 30 days delinquent grew 3.7% from a year ago to 2.66%, while the percentage of loans 60 days delinquent grew 8.6% from a year ago to 0.74%. But as previously mentioned, the uptick in delinquencies was expected given the growth in subprime loan portfolios.
In fact, finance companies specializing in subprime auto finance posted the biggest increase in delinquencies, with the segment’s percentage of loans 30 days delinquent rising from 5.32% in the year-ago period to 6.02%. Credit unions realized a slight uptick in their 30-day delinquencies, which rose from 1.38% in the year-ago quarter to 2.52%. Banks and captives, however, posted a decrease in their 30-day delinquencies, which fell from 2.11% and 2.6% in the year-ago quarter, respectively, to 2.07% and 2.52%.
Finance companies also posted the biggest increase in 60-day delinquencies, which increased from 1.82% in the year-ago quarter to 2.07%. Sixty-day delinquencies for banks and credit unions inched up from 0.56% and 0.32% in the year-ago period, respectively, to 0.59% and 0.35%. Captives were the only segment to realize a decrease in 60-day delinquencies, which fell from 0.46% to 0.44%.
A New High
Also on the rise in the third quarter was the average amount financed. Driven by rising transaction prices, the average amount financed on new-vehicle purchases rose $1,080 from a year ago to a record high of $27,799. As for used, the average amount financed rose $676 to $18,576, which was also a record high.
Those increases, combined with the spike in year-over-year vehicle sales and a heavier reliance on auto finance on the part of consumers, caused the overall dollar volume currently outstanding to increase from $784 million in the year-ago period to $870 billion.
And all lending segments benefited from that growth, with auto loan portfolios for banks jumping from $279 billion in the year-ago quarter to $306 billion. Loan portfolios for credit unions grew from $173 billion in the year-ago period to $201 billion, while finance companies saw their portfolios increase from $112 billion in the year-ago period to $134 billion. As for captives, their auto loan portfolios grew from $200 billion to $209 billion.
Payment Relief Sought
Payment-conscience consumers reacted to rising transaction prices by seeking out ways to keep payments affordable. It’s one of the reasons leasing’s share of new-vehicle financing jumped from 27.22% in the year-ago quarter to 29.14%.
Loan terms also continued to stretch in the third quarter, with the 73-to-84-month term range growing by 23.67% from the year-ago period. But even the pickup in leasing and the stretching of loan terms couldn’t offset the jump in new-vehicle payments.
In the third quarter, the average monthly payment for a new vehicle rose $12 from the year-ago period to $470. For used vehicles, payments jumped from $350 in the year-ago quarter to $358, while the average lease payment fell from $404 in the year-ago quarter to $397.
Subprime on the Move
Subprime financing also grew during the third quarter, but only moderately as finance sources continued to maintain discipline in the high-risk tiers. In fact, subprime and deep subprime loans accounted for 10.57% of all new vehicles financed in the third quarter, a one percentage-point gain from a year ago.
Average credit scores for new-vehicle loans, used-vehicle loans and new-vehicle leases also showed little change year over year. For new-vehicle loans, the average credit score fell two points from a year ago to 713 in the third quarter. For used-vehicle loans, the average credit score increased two points to 650, while the average credit score for leases fell by one point from a year ago to 718.
No Cause for Alarm
Industry observers are always wary when subprime and deep subprime lending rises, but the increase in the third quarter was only slight. And at 10% of the market, subprime and deep subprime auto loans still represent a relatively small piece of the pie.
As long as consumers continue to make their payments on time and lenders keep a close eye on how delinquency rates fluctuate year over year, the industry should remain relatively stable. It’s also important that dealers and their F&I office keep an eye on shifts in payment behavior and the risk appetite of finance sources, as those insights can trigger actions that affect vehicle prices, loan terms and interest rates.
Melinda Zabritski serves as senior director of automotive finance for Experian Automotive. E-mail her at [email protected]