Proceed With Caution
Automotive finance made headlines during the second quarter, but not for the reasons it would have liked. Instead, several news outlets, including The New York Times, raised concerns about an emerging bubble in the subprime auto-finance space, one that is on track to burst if something isn’t done.
The metric The New York Times used to back its claims was one released from my firm, which said that, in the first three months of 2014, banks wrote off “as entirely uncollectable" an average of $8,541 of each delinquent auto loan, up about 15% from a year earlier. If the authors had waited, however, they would have learned that subprime financing began to level off in the second quarter. They would have also learned that delinquencies remain at historic lows in the second quarter despite outstanding loan balances increasing 11.7% from a year ago to a record $839.1 billion.
That’s not to say there aren’t concerns that need to be monitored and managed. The 60-day delinquency rate, for instance, rose 7% from a year ago to 0.62%, while the 30-day delinquency rate rose slightly from 2.38% in the year-ago period to 2.39%. Furthermore, the total balance of loans 60 days delinquent increased by $859 million from the year-ago period, while the balance of 30-day delinquent loans increased by $2.8 billion from a year earlier.
However, there were signs in the second quarter that finance sources are being cautious in their approach to the subprime market. The following provides a look at the top auto finance trends from the second quarter.
The rise in delinquencies wasn’t the only negative trend to pop up during the quarter. Repossessions also saw a significant increase in the second quarter, with the rate jumping more than 70% from a year ago to 0.62%. However, this trend is slightly misleading.
Based on second quarter data, finance companies were the only financing segment to realize a year-over-year increase in its repossession rate, which rose 142.6% from the second quarter 2013 to 2.75%. In fact, captives saw their rate drop by 9.1% from a year ago to 0.30% in the second quarter, while the rate for banks and credit unions dropped 1.6% and 1.4%, respectively.
Dollar Volume Rises
As for the record $839.1 billion in outstanding loan balances, the year-over-year increase in quarterly dollar volume was experienced across all finance segments. Banks led the way with a $31 billion year-over-year increase, while credit unions, finance companies and captives realized year-over-year increases of $25 billion, $24 billion and $9 billion, respectively.
In terms of market share, banks held the largest share (34.9%) in the second quarter, followed by captives (27.21%), credit unions (16.69%), finance companies (14.46%) and buy-here, pay-here dealers (7.58%). Credit unions posted the biggest gain, growing their share by 9.1%, followed by captives at 7.8%. Conversely, BHPH dealers, finance companies and banks saw their shares of the auto finance market drop 9.6%, 8.8% and 3.4%, respectively.
Subprime Financing Pace Slows
As previously noted, subprime auto finance showed signs of leveling off in the second quarter, with the percentage of new-vehicle loans made to subprime and deep subprime borrowers falling 22.1% from a year ago to 15.1%. While that percentage may be higher than the 10.2% recorded during the peak of the 2009 recession, it is still well below prerecession highs of 16.6% in the second quarter 2008 and 19.9% in second quarter 2007.
Similarly, the percentage of used-vehicle loans extended to the subprime and deep subprime segments in the second quarter was 40.2%, down from 50.6% in the year-ago period. Again, the figures are up slightly from the 39% recorded in the second quarter 2009, but they are still below the prerecession levels in 2008 and 2007 of 43.4% and 46.6%, respectively.
Average loan amounts extended to subprime and deep subprime consumers also fell during the quarter, with new-vehicle loan amounts for subprime borrowers dropping to $27,347 from $27,563 in the second quarter 2013. The amount extended to new-vehicle borrowers in the deep subprime tiers also fell from $25,486 in the second quarter 2013 to $24,836. For used vehicles, the average amount financed for subprime customers fell to $16,546 from $17,020 in the second quarter 2013, while the average amount finance for deep subprime borrowers fell to $14,358 from $15,113 in the second quarter 2013.
Record Leasing Fuels Used-Vehicle Market
The auto finance industry reached another milestone in the second quarter, with leases accounting for a record 25.6% of all vehicles sold in the second quarter. That’s up from 23.4% in the year-ago quarter. Also up was the average credit score for new-vehicle leases, which rose from 706 one year ago to 717 in the second quarter.
While average credit scores may put leasing out of reach for credit-challenged customers, the pace of leasing is helping to restock the used-car market — which has experience consistent growth over the last few years. And aside from used-vehicle prices reaching new highs, more consumers, especially those who are credit challenged, are turning to the used-vehicle market.
And lenders are extending themselves to help consumers get into those vehicles, with the average loan amount (up $345 from a year ago) and monthly payment (up $4 from a year ago) reaching all-time highs of $18,258 and $355, respectively. As for new vehicles, the average amount financed rose from $26,526 in the year-ago period to $27,429, while the average monthly payment increased $10 from a year ago to $467.
Managing Risk Key
Despite the increase delinquencies and repossessions in the second quarter, risk has stayed at manageable levels thanks to cautious lender policies in the subprime market — as evidenced by the declining percentages of auto loans made to subprime borrowers.
As long as consumers in these high-risk finance segments continue to pay their bills on time and are placed in vehicles that fit their budget, delinquency balances should remain in check. As always, the industry needs to keep an eye on delinquency rates and repossessions to ensure the market remains healthy and that predictions of a supposed subprime bubble are never realized.
Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at firstname.lastname@example.org.
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