Auto finance market shows strong growth

The latest quarterly research from Experian on auto finance has put paid to lingering sub-prime bubble rumors, with the data showing that lending to those with poor credit scores fell to record lows, leading the consultancy to conclude that the auto financing market continues to get stronger and stronger.

Experian’s State of the Automotive Finance Market report for the third quarter of 2016 shows that loans extended to consumers in the sub-prime tier fell 4.5% from the previous year, while loans to deep sub-prime consumers dropped 2.8% to the lowest level on record since 2011.

Looking specifically at used vehicle loans, the sub-prime sectors saw an even larger decrease. Loans to consumers with deep sub-prime credit were down 5.3% to 5.11%, the lowest the research team has seen on record since tracking began in 2007.

In contrast, newly originated loans to prime borrowers jumped 2% to encompass nearly 60% of auto loans financed in Q3 2016. The share of new vehicle leasing also rose significantly to reach 29.49%, up from 26.93%.

“For anyone making doomsday predictions about a sub-prime bubble in the auto industry, Q3 2016 provides a stark reality check,” said Melinda Zabritski, Experian’s senior director of automotive finance. “This quarter’s report shows that lenders are reducing the percentage of loans to the sub-prime and deep sub-prime risk tiers while increasing the percentage to consumers with good credit.”

“The most important takeaway here is to understand the market reality and not to be led astray by rumors or unsubstantiated facts. By doing so, lenders, dealers and consumers are able to make smarter decisions and more easily explore financing programs and other opportunities available to them,” Zabritski advised.

The report also found that average credit scores for both new and used vehicle loans are on the rise. For new vehicle loans, the average credit score climbed two points to 712 in Q3 2016, marking the first time average credit scores for new vehicle loans rose since hitting a record high of 723 in Q2 2012. For used vehicle loans, the average credit score jumped five points to 655.

Thirty-day delinquencies were flat year-over-year, at 2.36 percent. However, 60-day loan delinquencies were up slightly, moving from 0.67 percent in Q3 2015 to 0.74 percent in Q3 2016.

Credit unions on the up

Zabritski said that perhaps the biggest shift from Q3 2015 to Q3 2016 was the growth in market share for credit unions, as consumers search for low interest rates. Credit unions grew their share of the total loan market from 17.6% in Q3 2015 to 19.6% in Q3 2016. For new vehicle loans, credit unions grew their share by 22%, going from 9.9% in Q3 2015 to 12% in Q3 2016.

According to the report, interest rate increases played a key role in helping boost credit union share. Interest rates for the average new vehicle loan went from 4.63% in Q3 2015 to 4.69% in Q3 2016.

“Credit unions typically have the most competitive interest rates, so any time rates jump overall, it’s a natural reaction for credit unions to see a rise in their market share,” Zabritski continued. “With vehicle prices and loan dollar amounts rising, car shoppers are looking for any relief they can get. Credit unions’ traditionally lower rates are obviously an attractive option.”