In response to a newspaper printing his obituary, Mark Twain quipped, “The report of my death was an exaggeration.” The famous quote could be the auto finance industry’s response to all the talk about an impending subprime bubble, as it closed out another quarter showing steady growth and remarkable stability.
What’s clear from Experian Automotive’s second quarter data is the market continued to build on its momentum from the first quarter, with the number of loans made during the period growing for all categories. The exception would be the high-risk tiers, with the share of loans made to car buyers with subprime and deep-subprime credit falling from 23.3% in the year-ago quarter to 22.8%.
Second quarter data did show a very slight uptick in delinquencies, with 30-day delinquencies rising 0.03% from the prior-year period to 2.22% of all open automotive loans. But even that increase doesn’t point to a subprime bubble lurking on the horizon. The following is a look at some of the trends that shaped the auto finance industry during the second quarter of 2016.
Leasing Motors to New High
Leasing was the big story of the second quarter, as the transaction type’s share of all new vehicles financed during the period climbed to an all-time high of 31.44%. That’s up 4.52 percentage points from the second quarter of 2015.
Even used-vehicle leasing showed some life, inching up 0.45 percentage points from a year ago to 3.71%. That’s not to say used leasing is becoming a prime option for car buyers, as the transaction type only accounts for about 40,000 transactions nationally per quarter.
The reason for the continued rise in leasing is transaction prices, with the average monthly payment for a new-vehicle loan coming in at $499. Conversely, the average monthly lease payment in the second quarter was $404.
And if car buyers weren’t flocking to leasing, they were agreeing to longer finance terms to keep their monthly payments affordable. In fact, the average new-vehicle loan term crept up to 68 months, while lease terms remained steady at 36 months. Hey, a new vehicle every three years for 20% less than the cost to finance carries a certain appeal for many consumers.
Second quarter data also showed that it wasn’t just the prime and superprime tiers that drove leasing to record levels; the transaction type experienced double-digit percentage growth across all tiers on a year-over-year basis. However, subprime and deep-subprime combined still represents less than 8% of leasing volume.
Used Loan Values Reach All-Time High
One trend that picked up momentum during the second quarter was superprime and prime buyers opting for used. These buyers opted for used 43.3% and 59.9% of the time, respectively representing year-over-year gains of 10% and 6.6%.
On average, a monthly used-vehicle payment was $135 lower than the monthly payment for a new vehicle. This cost savings, supported by continuing improvements in vehicle quality and reliability, spells value as well as reduced cash outlays for these savvy purchasing segments, which were obviously looking to simply avoid a high monthly payment.
And it’s that shift that has pushed the average credit score for used-vehicle loans up four points to 648. Conversely, the average credit score for new dropped 10 points to 710 over the same time period.
Credit Unions Up, Finance Companies Down
The period also saw the auto finance industry surpass the $1 trillion mark in total outstanding balances for the second consecutive quarter, with balances totaling $1.027 trillion. Commanding the largest share were banks and captive finance companies, although their market share grew only slightly from a year ago.
Banks grew their share from 34.7% in the prior-year period to 34.8%, while captives also increased their share from 27.3% to 27.7% during the same timeframe. Credit unions experienced the largest percentage increase (8.6%), while finance companies experienced a 13.1% drop in their share.
In Need of Payment Relief
It’s clear consumers are looking for relief from high transaction prices, with the average amount financed on a new vehicle rising $1,356 from a year ago to $29,880. And even though the average amount financed for a used vehicle rose 2.25% from a year ago to a record high of $19,101, a used vehicle still represents relief from a skyrocketing average new-car payment that is starting to look more like a mortgage.
Based on Experian’s second quarter data, the growth seen in loan values and the relatively flat state of delinquencies, auto finance’s short-term outlook appears to be good for all finance segments. A steady hand in meting out risk with subprime and deep-subprime customers, as well as the ability to keep payments reasonable across all lending types will definitely keep consumers current on their payments, the market stable, and all bubbles at bay.
Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. Email her at [email protected].