More consumers are turning to unsecured personal loans and credit cards to deal with the financial pressures of high inflation, a trend that will impact the auto industry and auto loans, says Satyan Merchant, senior vice president of auto for TransUnion’s financial services vertical.
“In the auto industry, most consumers consider the monthly payment above all,” he says. “The cost of the vehicle, as well as the interest rate and the loan term, are what drives that. With higher balances on credit cards and personal loans, consumers now have less money for auto loan payments.”
The trend led to a softening of the auto market in the third quarter, with Merchant citing inflation, higher interest rates, and constrained inventories as some of the main drivers of the shifted market.
TransUnion’s third-quarter Quarterly Credit Industry Insights Report (CIIR) shows consumers are feeling the burn of the high-inflation environment experienced throughout 2022, Merchant says.
“The inflation we are observing is not just in the auto segment but in all segments, and it is taking a big bite out of consumers’ wallets and their ability to pay in the credit card space. That has translated to higher credit card balances as consumers rely more on revolving credit and personal loans.”
In the third quarter, credit card balances hit a record high of $866 billion, a year-over-year increase of 19%. Balances among Generation Z and millennial buyers grew the most, at 72% and 32%, respectively, the CIIR shows.
Still, Merchant says that the increased prices of groceries, fuel and other expenses, while putting pressure on consumers, may not lead to lower loan originations or greater delinquencies, which should not change if employment numbers stay strong, he says.
“There should continue to be a steady flow of consumers seeking access to new credit products, credit cards and personal loans in particular, and currently an ample supply of lenders are willing to offer credit to them,” says Michele Raneri, vice president of U.S. research and consulting for TransUnion.
Raneri notes that delinquencies remain in line with historical levels for most credit products but cautions that delinquency levels have risen over the past year, particularly among subprime consumers.
“This trend should be monitored in the coming months to look for similar increases in other credit risk tiers,” Merchant says.
Higher interest rates, which are intended to dampen inflation, have delivered a reduction in mortgage activity and mortgage originations. Loan originations declined 47% year-over-year in the second quarter, according to the CIIR.
Loan originations are also down in the auto industry, Merchant says, falling 14.9% year-over-year. When compared to prepandemic second-quarter levels, originations were down 4.1%.
“But with auto, the impacts include what is going on with the consumer and persistent supply-chain challenges,” he says.
WHY THE ORIGINATION SHORTFALL?
New-vehicle inventory shortages are the leading factor driving down originations, with super-prime originations decreasing 18.5% year-over-year, Merchant says.
He says that it was not a surprise that originations of super-prime loans have fallen.
“Super-prime borrowers buy new vehicles, and it’s been such a challenging time for new-vehicle inventory,” he says. Inventory shortages of new vehicles pushed people into the used vehicle market, which comprised most financed vehicles, Merchant says. Consumers financed more of the total vehicle cost in the second quarter. They financed those vehicles at 60% in that quarter, up from 55% year-over-year, according to the CIIR.
“Subprime borrowing is not nearly down as much as super-prime,” he says. “That category is more reflective of used-car buyers.”
However, overall “originations are down and will remain down as long as inventory challenges persist,” he says. Merchant says dealers indicate that inventory levels are now on the uptick, but he says vehicle affordability is driving down origination levels.
“Supply-chain challenges, while easing moderately in recent months, continue to affect the auto industry. This has affected vehicle costs. Afford ability has been a challenge in auto for years, even prepandemic. The cost of financing vehicles at higher interest rates adds to the affordability concerns. It will be interesting to see where each segment goes in the future. Subprime may be down in the future because of higher inflation. The subprime consumers are more impacted by inflation.”
Merchant says that if the prices of goods that consumers need, i.e., rent, groceries, fuel and other goods, increase by $100 a month, it won’t impact consumers in higher-income brackets but will be detrimental to those at lower income level.
It’s a good news, bad news scenario, he explained. The good news is that wholesale
“How is that consumer doing?” he says. “TransUnion offers solutions, like its trended attributes or credit vision data, that allows lenders to examine what’s going on with that consumer, not just in their auto loan but across their wallet.
“What is happening with that consumer financially? Are they keeping up with their credit card payments? Do they have liquidity with their app? Are they making extra payments on their credit cards? That’s a sign they have a little bit of extra money. If they always paid the credit card off but now are making minimum payments, it may be a sign that their liquidity is going away.”
Auto loan rates are trending upward, but there are things lenders can do to help the consumer, Merchant says.
It starts with getting a full picture of the consumer and his or her risk.
“Knowing the complete financial picture of the consumer may allow the lender to price the loan better,” he says. “Three consumers might have the same credit score, but if you dig deeper and apply trended data attributes, you may see that one of them has been paying down their balances and their credit score has risen recently. That consumer is on an upward trend. Maybe you can give them a better rate than someone whose score has trended down from a 650 to a 600 recently.”
Using consumer data versus the normal credit score in order to price the individual consumer’s loan is “more appropriate to the risk that they pose,” he says. “It makes sense to offer a better rate to the consumer who has been paying down their balances. You want to remain competitive with other lenders, but you also want your rates to reflect the risks posed by the individual consumer.”
Doing those things can provide a “bit of relief to the consumer,” he says. “Lenders are not taking on more risk because you are looking at more data attributes.” The sky is not falling in auto buying and lending. But cloudier skies point to a need for dealerships and lenders to proceed with caution, keeping a closer eye on consumer risk factors than in recent years.
Ronnie Wendt is an editor at F&I and Showroom.
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