Auto loan delinquencies predicted to spike

The combination of expected interest rate increases and more sub-prime borrowers in the consumer lending market will result in delinquency rate rises in 2017 for auto loans according to analysis from TransUnion.

The ratings agency’s 2017 consumer credit market forecast shows that delinquency rates for auto loans now stand at 1.4% in Q4 2016, compared with 1.36% in the same period last year and 1.15% in Q4 2012.

“The consumer credit markets have been functioning extremely well the last few years, but an increase in sub-prime lending has begun to impact delinquency levels for some industries, specifically the auto finance and credit card market,” reports Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit.

“These projected increases in delinquency are not surprising, nor are they yet a cause for concern,” said Verma. “Lenders are adjusting their underwriting strategies to maintain a good balance between expected losses, consumer credit access, customer utility and investor returns—and in the end, that balance is a benefit to all parties.”

More risk

The auto delinquency rate is projected to close 2017 at 1.4%, the highest level since 1.59% at year-end 2009. TransUnion expects the auto delinquency rate will reach 1.36% in Q4 2016, a 7% year-over-year increase from 1.27% in Q4 2015.

“Greater access to auto loans for non-prime consumers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfolio. An increase in delinquency is the natural consequence of that strategy,” explained Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion.

“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,” he forecast.

In Q3 2016 (the latest data available), there were 74.8 million auto loan accounts. Non-prime accounts grew 7.5% to 25.1 million auto accounts in Q3 2016, up from 23.3 million in Q3 2015.

Slowing sales

As the annual growth rate of new vehicle sales is expected to taper and interest rates are expected to rise, TransUnion expects auto sales to still grow, but at a lower rate than experienced in recent years.

Growth in average auto balance per consumer is expected to slow to levels last observed in 2011. The average balance is projected to grow at a 2.4% rate between year-ends 2015 and 2016, compared to the 3.1% growth rate between Q4 2014 and Q4 2015 and 4% growth between Q4 2013 and Q4 2014. Average auto balances are expected to reach $18,435 in Q4 2016 and $18,840 in Q4 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,” said Laky.