Sub-prime auto lending stable

The American Financial Services Association (AFSA) says a panel of experts representing the three major US credit bureaus — Equifax, Experian and TransUnion – has concluded that current credit data indicates a stable sub-prime auto lending market and no evident weakening in lenders’ underwriting practices.

Speaking at a conference held by the national trade association for the consumer credit industry, the panelists cited factors like low unemployment, the healthy economy and risk-based analytics tools used today by lenders as some of the reasons for their conclusions.

New research from Equifax examines auto lending dynamics and resulting performance differences. Findings point to continued strength in what has increasingly become a segmented sector within which different lender types specialize in narrow credit bands. Most lenders remain very conservative relative to their pre-recession lending habits, while some are meeting the needs of consumers with lower credit scores.

“The fact is loan performance is good relative to historical levels and the slight weakening we are seeing cannot be attributed to a change in how lenders are underwriting their loans or call into question the stability of the sub-prime market as a whole,” said Amy Crews Cutts, SVP and chief economist for Equifax. “Consumer data tells us that market share is shifting across different lender types and specialty lenders are lending in higher-risk segments that are not otherwise being served.”

Experian’s data has shown that the overall automotive lending market is quite healthy. In fact, based on its third quarter data, lenders are becoming increasingly conservative, reducing their share of sub-prime loans and lending to customers with higher average credit scores.

Specifically, the total sub-prime market is down 4.3% from 2015, to make up 20.39% of the loan origination market. Conversely, the total prime market rose 2% in Q3 2016 to make up 59.8% of loan originations.

Volume growth

Melinda Zabritski, senior director of automotive finance for Experian, said: “While we may have seen growth in sub-prime or deep-sub-prime loans in recent years, it is important to keep it in perspective – the entire market has grown from a volume standpoint across all risk tiers. Some of the more interesting trends our research has shown is that consumers, most notably prime consumers, are moving away from new car shopping and leaning towards leasing and financing used vehicles in order to keep payments more manageable.”

According to TransUnion’s Industry Insights Report, outstanding auto loan and lease balances for sub-prime consumers totaled $172 billion at the end of Q3 2016. This represents 16% of the $1.1 trillion in total auto balances. By comparison, sub-prime balances represented over 20% of outstanding auto balances at the end of the recession in Q3 2009. While TransUnion observes an increase in 60-day+ delinquency for auto accounts, it is still below the levels observed in 2009, and auto loans and leases remain among the lowest delinquency credit products.

Jason Laky, senior vice president and automotive business leader at TransUnion, said: “Auto payments also continue to be a priority for consumers, and a hedge against the risk of an auto finance bubble. In fact, TransUnion research has found that – since at least 2003 – consumers have placed an emphasis on paying their auto loans before their mortgages and credit cards.”