Subprime lending continues to elicit fears and worries. Talks about another subprime crisis waiting to happen are rife. But a recent quarterly report by Experian Automotive revealed that the market for subprime loans is actually growing. And that, auto lenders don’t mind reaching out to these so-called subprime borrowers and their deep-subprime fellows. Can we take it to mean that subprime auto loans are here to stay?
State of Auto Financing
Experian Senior Director of Automotive Finance Melinda Zabritski observed, “Automotive lenders seem to be keeping cool heads when it comes to how much risk they are willing to take with subprime and deep-subprime customers.”
“Yes, subprime and deep-subprime loans are growing, but the entire market is growing from a volume perspective across all risk tiers. In fact, the subprime loans have actually dropped as a percentage of the total market. That, combined with only a slight uptick in delinquencies, makes clear that the sky is not falling.”
The market share of deep-subprime and subprime auto loans and leases fell to 22.8% during the second quarter of 2016, compared to 23.3% in the second quarter of 2015, according to Experian’s State of the Automotive Finance Market report and its accompanying press release in September.
The relevant quarter results showed more loans being made to super-prime borrowers, representing 17.9% of all auto loans and leases. Meanwhile, loans made to deep-subprime borrowers took a 3.5% share of the whole auto loan and lease market.
Delinquencies that were 30-day old rose slightly higher in Q2 2016 to 2.22%, compared to 2.19% back in Q2 2015. Sixty-day late payments also ticked up to 0.62% from the previous 0.56%.
Used Car Loan and Leasing Nation
Leasing and used vehicle loans dominated the vehicle market scene in the second quarter of 2016, according to Experian.
The share of new vehicles leased showed a record jump of 31.44% during the reporting period, compared to the second quarter of 2015’s 26.92%. Leasing of used vehicles also showed an uptick of 3.71%, compared to the previous 3.26%.
The market for used vehicles experienced an all-around surge during 2016’s second quarter. Loans for used vehicles accounted for more than half of the total vehicle loans originated in Q2 2016 with an astonishing 55.61%. Used vehicle financing also averaged $19,101 during Q2 2016, an all-time high compared to $18,671 during Q2 2015.
This upward trend in the used vehicles market is mainly due to prime and super-prime borrowers. Ms. Zabritski offered this explanation: “One of the biggest trends we continue to see is the shift to used vehicles by customers with excellent credit.
“As vehicle prices continue to rise, savvy consumers are looking for ways to control costs. That appears to be pushing more customers towards used vehicles.”
Q2 2016 Trends
During the second quarter of 2016, Experian found these trends in the auto financing and leasing market:
- A used vehicle loan has an average monthly payment of $364 in Q2 2016, compared to Q2 2015’s $361.
- A new vehicle loan’s monthly payments can average $499 in Q2 2016, compared to $483 in the second quarter of 2015.
- A new vehicle loan taken out in Q2 2016 has an average amount of $29,880, compared to $28,524 lent in Q2 2015.
- Credit scores of customers applying for new auto loans averaged 708 in Q2 2016, slightly down from 709 in the second quarter of 2015.
- On an average, new vehicle loans had a term of 68 months in Q2 2016, a month increase from Q2 2015’s 67 months.
What does credit bureau Experian have to say about the fears surrounding subprime auto loans and the subprime lending market in general: “…those fears haven’t come to fruition, and the automotive credit market has continued to show steady growth and remarkable stability quarter over quarter.”