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Subprime Borrowers, Expected Interest Rate Hikes to Drive Up Delinquency Rates in 2017

Transunion projects the auto loan delinquency rate for consumers with payments 60 or more days past due to close the year at 1.4%, the highest level since year-end 2009. Even with this increase, TransUnion said delinquency rates will remain well below levels observed during the last recession.

by Staff
December 14, 2016
3 min to read


CHICAGO — Projected interest rate hikes and more subprime borrowers in the consumer lending market are expected to fuel a rise in delinquency rates in 2017 for auto loans and credit cards, according to TransUnion’s 2017 Consumer Credit Market Forecast.

The firm said it also expects serious mortgage loan delinquency rates to drop, while unsecured consumer loan delinquencies are expected to experience only a minimal increase next year.

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“The consumer credit markets have been functioning extremely well the last few years, but an increase in subprime lending has begun to impact delinquency levels for some industries, specifically the auto financing and credit card markets. … For auto finance, this figure is now at its highest point since the conclusion of 2013,” said Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit.

Transunion projects the auto loan delinquency rate for consumers with payments 60 or more days past due to close the year at 1.4%, the highest level since year-end 2009. Even with this increase, TransUnion said delinquency rates will remain well below levels observed during the last recession, when delinquency rates stood at 1.59% for consumers 60 days or more past due.

“Greater access to auto loans for nonprime consumers suggests that lenders have made deliberate decisions to accept more risk from nonprime loans in their portfolio,” said Jason Laky, senior vice president and automotive and consumer lending business leader for Transunion. He put the fourth quarter delinquency rate at 1.36%, a 7% increase from a year ago.

“An increase in delinquency is the natural consequence of that strategy," he added. "If lenders are compensated for the additional risk in the portfolio, a modest increase in delinquency should not disrupt the auto finance market. We do not expect to see a surge in auto delinquency unless there is an economic shock.”

In the third quarter of this year, there were 74.8 million auto loan accounts, according to TransUnion. Of those accounts, 25.1 million belonged to nonprime consumers, a 7.5% increase from a year ago.

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Due to the expected tapering of annual growth rates for new-vehicle sales and today’s expected interest rate hike, TransUnion expects auto sales to still grow but at a lower rate than in recent years. Additionally, growth in the average auto balance per consumer is expected to slow to levels last observed in 2011, with the average balance expect to grow at a rate of 2.4% between year-ends 2015 and 2016. The growth rate between the fourth quarters of 2014 and 2015 was 3.1%, while the rate between the fourth quarters of 2013 and 2014 was 4%.

Additionally, average auto balances are expected to reach $18,435 in the fourth quarter of 2016, and $18,840 in the fourth quarter of 2017. "Average auto balance growth began to slow at the beginning of 2016, and we expect this more moderate growth to continue through 2017 if wage growth continues," Laky said. 

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