It seems every time there’s a rise in subprime auto finance, the media suffers from a bout of Chicken Little Syndrome. But the sky isn’t falling.
Since the 2008 financial crisis, antennae go up anytime subprime financing is mentioned. What the media fails to realize is subprime mortgage was the main contributor of that collapse. Unfortunately, it’s guilt by association when it comes to subprime auto finance.
So, yes, subprime auto finance did show gains in the fourth quarter 2014, but so did every other risk tier. By the way, 30- and 60-day delinquencies remained pretty flat from a year ago. So, again, the sky isn’t falling. Here’s a look at some of the key trends that shaped the automotive finance market in 2014’s closing quarter.
The total outstanding balance on open automotive loans continued to increase in the fourth quarter, rising from $800 billion in the year-ago period to an all-time high of $886 billion. The main reason for that is the percentage of new vehicles purchased with financing reached 84%, while the percentage of used vehicles financed reached a record high of 55.2%.
And every risk tier enjoyed a rise in volume, with deep-subprime, subprime and nonprime financing up 5.6%, 3.8% and 5.1%, respectively. Counterbalancing those gains were the 5.5% and 7.9% gains in prime and superprime financing from a year ago, respectively.
And despite its overall growth, the share of deep-subprime financing remained flat on a year-over-year basis at 3.8%, while the share of subprime financing actually decreased from 16.9% in 2013’s final quarter to 16.6% in the fourth quarter 2014.
Loan Amounts Rise
Looking at finance amounts, the average new-vehicle loan reached an all-time high in the fourth quarter, jumping $950 from a year ago to $28,381. The average used-vehicle loan was also up from a year ago, rising by $437 to $18,411. Larger loans also meant larger payments, with the average new-vehicle payment reaching a record high of $482.
The higher loan amounts and payments pushed many consumers to seek payment relief by agreeing to longer terms, with the average new-vehicle loan term increasing one month from a year ago to 66 months. For used vehicles, the average term increased one month from a year ago to 62 months.
Consumers also tried to fend off higher payments by turning to leasing, which grew 3.6% from a year ago to reach nearly 30% of all new vehicles financed during the quarter. And the average monthly lease payment decreased $12 from a year ago to $408 in the fourth quarter. In addition to being less expensive, leases were slightly easier to obtain, with the average credit score for a new-vehicle lessee falling two points from a year ago to 717.
Average Credit Scores Rebound
Credit scores, overall, have fallen since the Great Recession, when credit standards tightened dramatically. Since peaking at 736 in the end-of-year quarter 2009, the average credit score for a new-vehicle loan has fallen to 712 in the fourth quarter 2014. And that’s just one point higher than the prerecession average of 711 in the fourth quarter 2007.
The average credit score for a used-vehicle loan, however, showed an increase in the fourth quarter, rising two points to 648. And at that level, the average remains eight points higher than the prerecession score of 640 at the end of 2007.
Delinquencies Remain Flat
One of the best measures of the auto finance industry’s health is delinquency rates, which continued to remain relatively low in the fourth quarter. Thirty-day delinquencies were up just one basis point from a year ago, rising from 2.61% to 2.62% of all open automotive loans, while 60-day delinquencies dropped slightly from 0.73% in the year-ago period to 0.72%.
Finance companies recorded the highest delinquency rates, with 30- and 60-day delinquencies accounting for 5.54% and 1.92% of the segment’s open automotive loans, respectively. At the opposite end of the spectrum, credit unions recorded the lowest 30- and 60-day delinquency rates at 1.49% and 0.30%, respectively.
Given what happened five years ago, there will always be people who get fidgety at the first sign of increased subprime activity. Like anything else in life, however, as long as it is done in moderation, it’s not harmful. In fact, it can even be healthy.
Easier access to credit does help stimulate vehicle sales, but it is still important to watch for any signs of trouble. By gaining insight into consumer payment behavior, finance sources have a better understanding of the market and are able to take action when extending credit. For example, a sharp rise in delinquencies and a significant jump in share of subprime financing could be indicators of a shift in market health. However, if delinquencies stay flat and subprime loans are balanced by superprime loans, there’s not much for even Chicken Little to worry about.
Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at [email protected]