AUTO LOANS

Longer Term Auto Loans

The TransUnion study determined that car loan terms between 73 and 84 months have more than doubled between 2010 and 2015. Indeed, one-quarter of all loans originated in the third quarter of 2015 were for loan terms between 73 and 84 months, compared to just 10 percent five years earlier.

Another factor the TransUnion researchers noted that even as average new auto loan amounts increased during the five-year period, the average monthly payment declined as consumers chose the extended loan terms.

For example, in the third quarter of 2015, the average new auto loan amount was $21,368, compared to $18,008 five years earlier. At the same time, the average new auto loan payment had fallen to $398 per month from $420 per month five years earlier.

Smaller monthly payments should help consumers afford their loans, but TransUnion found that consumers holding longer loans are more likely to fall behind on their payments by at least 60 days (seriously delinquent) than those with shorter terms. And it wasn’t just sub-prime borrowers who were delinquent at a greater rate — the trend affected prime and super prime borrowers as well.

Mitigating Auto Loan Risk

Jason Laky, senior vice president and automotive business leader for TransUnion, noted, “Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles. However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans. We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage.”

For consumers with sufficient cash flow, the risk of a longer term auto loan defaulting diminishes according to TransUnion. Thus, the credit reporting agency urges lenders to carefully explore all applicant debt when underwriting, including mortgages, credit card payments, student loans, and other debt commitment. In effect, an “aggregate excess payment” or (AEP) algorithm is useful for helping lenders determine lending risk and make their decisions accordingly.

As for consumers, affording a new car may mean much longer auto loan payments, going well beyond the original loan term all in an effort to purchase beyond their capabilities.

Bad credit car loans: what is the risk?

Within the next few days, you will learn that August 2014 auto sales were once again robust. The US market is not yet at its apex, but it certainly is far removed from the dismal 10.4 million vehicle sales of 2009. When the year ends we should find a market with more than 16.5 million units sold.

loans

Subprime Auto Loans

Fueling the sales increase are loans to millions of buyers that might otherwise not afford a new car without some easing of lending rules. These consumers do not have good credit, but their credit may still meet minimal lending requirements. For people with sub-standard credit and in need of a new car, the credit “easing” is certainly a welcome move.

Some media analysts, however, are worried that a subprime auto lending bubble is forming, similar to the housing bubble that caused the market to tumble in 2008, ushering in the Great Recession.

The New York Times Investigates

In July, the New York Times ran an article, “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates,” where reporters took a look at the “new subprime boom” and shared horror stories of consumers who were qualified for auto loans, but eventually had their cars repossessed when they could not keep up with their payments. It was just one of a handful of stories in the past few months that have indicated an auto loan apocalypse may be imminent.

The alarm has been sounded, but not everyone is in agreement with the warning. Late last month the consumer and commercial data company, Equifax, Inc., issued a statement refuting the notion. In its monthly Economics Trend Commentary, two of its experts — Chief Economist Amy Crews Cutts and Deputy Chief Economist Dennis Carlson — arrived at a much different conclusion.

Equifax Consumer Credit Reports

The Equifax team assembled aggregate data derived from credit reports for more than 210 million consumers in the company’s own database. That information assessed the current state of subprime automotive lending with potential economic benefits considered.

The lending landscape today is not the same as it was in 2007 — both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased, said Dennis Carlson, Deputy Chief Economist, Equifax. In this Commentary, we discuss why we believe that while the subprime lending segment needs to be monitored carefully the evidence at this time does not suggest there is a bubble forming.

Equifax backed up its claim with a seven-page report that chided the press for making rhetorical arguments without supporting those claims with facts. Further, Equifax defended the market, noting that “a fair and functioning “second-chance market” is necessary for a fully functioning economy.”

Without access to a car many people find it difficult to get a job as well as to get to a job. Moreover, a number of people with subprime credit may have lost their jobs and/or their homes during the Great Recession. Subprime lending allows them to get back on their feet and put their hardships behind them.

Loan Originations and Subprime Share

Equifax supported its claims with charts that underscored several important points, including the number of auto loan originations and the subprime share. That share today is more than 5 points lower than it was in 2007, just ahead of the last recession. Equifax measures subprime lending as a credit score under 640 points.

The percentage of auto loans that are at least 60 days past due comes in at just under 3 percent or slightly lower than the pace set in 2006 and 2007, but above the rate during the recession. Moreover, the loan write off rate is still lower than the years leading up to the Great Recession, demonstrating that defaults are under better control today. You can review a portable document file (pdf) of the report here.

The New York Fed Weighs In

Equifax is not alone in refuting stories of a pending subprime auto lending bubble. Earlier in Aug., Bloomberg Businessweek also examined the New York Times’ claims, then cited the findings of four New York Fed economists who had a different viewpoint. The Fed said, “We do not see evidence supporting a disproportionate or unusual volume of new loans being issued to riskier borrowers.”

A follow up blog article by the Fed on Aug. 14, 2014, did note an increase in subprime lending, but also found an increase in prime auto lending. Thus, the subprime share is “less pronounced” and the threat that some people see as looming still has a long way to go from reaching a tipping point.

What Your Dealer Won’t Tell You About Car Financing

Zero Percent Financing: Is It Worth It?

How to Obtain a Bad Credit Car Loan

Bad Credit Can Wreck Your New Car Dreams

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