Equifax says auto lending market strong

Originations currently stand at their highest level since 2008, but auto lending performance is stable across all the whole credit range, according to the latest research from Equifax which downplays fears that the sub-prime auto loans sector is growing out of control.

Its National Consumer Credit Trends Report says 2015 marked another strong year for the auto loan market as originations increased year-over-year, while the mix of loans across the entire credit spectrum held for the fourth year in a row.

Sub-prime

According to Equifax data, from January through November 2015, 21.7% of all auto loans originated during this timeframe were issued to consumers generally considered to be sub-prime. It says sub-prime auto loans have consistently accounted for between 21% and 22% of new auto loans for the past four years.

“Considerable attention is being given to the subprime segment with some analysts mentioning concern that it is growing disproportionately faster than originations to other segments of the credit spectrum, although the proportional mix has remained relatively static since 2012,” said Amy Crews Cutts, chief economist at Equifax. “Credit performance is still excellent, showing that lenders are prudently extending credit to well-underwritten borrowers.”

“Lenders are making more informed lending decisions and the underwriting process has been strengthened as a result of new data and technology that is available to the marketplace,” Cutts continued. “For example, today lenders have access to instant income and employment verification which help to accurately portray a consumer’s ability to repay the debt.”

The National Consumer Credit Trends Report cites normal cyclical patterns in delinquency and write-off rates, but also points to a shift in the marketplace with finance companies growing originations more quickly than banks, who were responsible for 53.7% of all new auto accounts from January through November 2015.

Record high

The report shows originations are at their highest levels since 2008. More than 26.8 million auto loans, totalling $554.8 billion, were originated between January and November 2015.

This is a 9.4% increase in accounts and a 12.4% rise in balances over the same time period in 2014. These are the highest levels for the period since Equifax began tracking this data.

The increase in car sales was behind the increase in loan activity, including growth in prime and sub-prime volume. Equifax reckons 5.8 million auto loans went to consumers in the sub-prime category, up 11.2% over 2014. These newly issued loans have a corresponding balance of $104.2 billion, a 14.5% increase year-over-year.

However, despite the rise in lending to this sector, the delinquency rate for auto leases and loans remained unchanged between January 2015 and January 2016, at 1.15%. This is under half the recession peak delinquency rate of 2.84% in January 2009.

Equifax reports a modest increase in loan write-offs of 1.8 basis points in January 2015 compared with January 2016. Write-off rates on total combined auto loans and leases outstanding rose to 22.5 basis points in January, up 1.8 basis points from the same month last year. Write-offs peaked at 50 basis points in March 2009.