Auto sub-prime bubble fears ‘inflated’

Experian says its latest data shows the automotive credit market has continued to show steady growth and ‘remarkable’ stability, and strongly suggests that fears of an impending automotive sub-prime bubble are misplaced.

Findings from the research firm’s Q2 2016 State of the Automotive Finance Market report show that while both 30- and 60-day loan delinquencies were up slightly, the combined sub-prime and deep-subprime share of new and used auto loans and leases dropped from 23.3% in Q2 2015 to 22.8% in Q2 2016.

Overall, automotive lenders made more than five times as many loans to super-prime customers (17.9% of total auto loans and leases) as to deep sub-prime customers (3.5% of total auto loans and leases).

“Automotive lenders seem to be keeping cool heads when it comes to how much risk they are willing to take with subprime and deep-subprime customers,” said Melinda Zabritski, senior director of automotive finance for Experian.

“Yes, subprime and deep-subprime loans are growing, but the entire market is growing from a volume perspective across all risk tiers. In fact, the subprime loans have actually dropped as a percentage of the total market. That, combined with only a slight uptick in delinquencies, makes clear that the sky is not falling,” she added.

Thirty-day delinquencies were up from 2.19% in Q2 2015 to 2.22% in Q2 2016, while 60-day delinquencies moved from 0.56% to 0.62% in the same time period.

Leasing gains momentum

Leasing continued its strong growth as the share of new vehicles leased jumped from 26.92% in Q2 2015 to a record-high of 31.44% in Q2 2016. Even used vehicle leasing, which accounts for a small slice of the lease market, experienced growth, moving from 3.26% share in Q2 2015 to 3.71% in Q2 2016.

Used vehicle loans also grew to record heights in terms of average dollar amount and overall loan share during the quarter. The average used vehicle loan reached an all-time high of $19,101 in Q2 2016, up from $18,671 in Q2 2016. Used vehicle loans also reached a new peak, accounting for 55.61% of all vehicle loans during Q2 2016.

The growth was driven by jumps in prime and super-prime consumers choosing used vehicles. Specifically, 43.3% of super-prime consumers selected a used vehicle, which represents a 10% increase over 2015. For prime consumers, 59.9% chose used, a 6.6% increase over the previous year. This shift also helped push the average credit score for a used vehicle loan from 645 in Q2 2015 to 648 in Q2 2016.

“One of the biggest trends we continue to see is the shift to used vehicles by customers with excellent credit,” Zabritski said. “As vehicle prices continue to rise, savvy consumers are looking for ways to control costs. That appears to be pushing more customers toward used vehicles.”