Auto loan delinquency rate at two year low

The US national auto loan delinquency rate has declined to its lowest level in two years, according to the most recent report from TransUnion.

The ratings agency says the auto delinquency rate (measured as the ratio of borrowers 60 days or more delinquent on their auto loans) dropped to 0.95% in Q2 2015, down 3.1% from 0.98% in Q2 2014. Auto delinquency rates are at the lowest level since Q2 2013, when delinquency rates dropped to 0.86%.

Sub-prime

Sub-prime (those consumers with a VantageScore credit score lower than 601) delinquency rates also continued their steady decline in Q2 2015. Sub-prime delinquency rates fell to 4.98% in Q2 2015, a 1.6% year-over-year decline from 5.09% in Q2 2014. On a quarterly basis, delinquency rates for sub-prime consumers declined 4% from 5.19% in Q1 2015.

TransUnion found that nearly 72.5 million consumers have an auto loan or lease as of Q2 2015, with nearly one-fifth (18%) of those consumers in the sub-prime risk tier. Despite the 13.1 million sub-prime consumers with auto loans, sub-prime participation remains below the 23.7% level observed in Q3 2009 coming out of the Great Recession.

“Lenders are being prudent about re-entering the sub-prime lending market, and consumers are effectively managing their loans as delinquency rates remain stable. In today’s lending environment, we’re seeing consumers across all risk tiers take advantage of low rates. Super prime consumers, typically a group with greater wherewithal to purchase their cars for cash, are also financing their cars with more frequency,” notes Jason Laky, senior vice president and automotive business leader for TransUnion (pictured above).

Super prime

Of the 72.5 million consumers with an auto loan or lease, 16.8 million belong to the super prime (those consumers with a VantageScore credit score 780 or higher) risk category. More than 23.3% of all auto loans are held by super prime consumers, an 8.2% year-over-year increase from Q2 2014.

Viewed one quarter in arrears (to ensure the large majority of accounts are reported and included in the data), new auto loan originations increased 4.3% year-over-year to 6.5 million in Q1 2015, up from 6.2 million in Q1 2014. On a quarterly basis, auto originations increased 5.3% from 6.1 million in Q4 2014.

loan debt per borrower grew 3.4% to $17,696 in Q2 2015. The growth moderated across all risk tiers on a year-over-year basis, with the slowest pace of growth since Q2 2012. “While growth rates have slowed progressively throughout the past two years, we are still in a high growth period,” said Laky. “Demand for auto loans was pent up during the Recession, and we’re seeing a return to a normal momentum.”

Young consumers

The youngest consumer group – those under age 30 – experienced growth in average balance for open auto trades in Q2 2015 with an average balance of $15,200, up from $14,778 in Q2 2014. Nearly 831,000 more young consumers had an auto loan in Q2 2015 than in Q2 2015.

“The auto loan market continues to be fueled by new account growth, higher balances financed and low delinquency rates,” said Laky. “We’re observing low delinquency rates in major US cities and many states, indicating a positive lending environment.”

Household debt balances

Additional research published by the Federal Reserve Bank of New York suggests US consumers are managing their financial commitments well. Its Household Debt and Credit Report shows household debt balances were largely flat in the second quarter of this year. Total indebtedness increased just $2 billion from Q1 2015, while foreclosures hit their lowest point in the 16-years of data collection.

The Fed’s statistics also show auto loan originations reached a 10-year high in the second quarter, at $119 billion, supporting a $38 billion increase in the aggregate auto loan balance, which has now passed $1 trillion. The increase in auto loans also drove most of the $67 billion increase in non-housing debt balances. Credit card balances increased, by $19 billion, to $703 billion, while student loan balances remained flat. Mortgage balances dropped by $55 billion.

“There was some tightening in auto-loan standards after the financial crisis, but by many measures it’s returned basically to where it was pre-recession,” said Wilbert van der Klauw, a New York Fed economist. “That’s quite a contrast to mortgage underwriting, which remains significantly tighter than before the recession.”