More consumers have chosen to finance their vehicles, while lenders have dug deeper into subprime space, experts suggest.
Subprime
Overall, 75.6 million consumers had an auto loan in the fourth quarter 2015, according to TransUnion. The number is up 7.8% year over year – the largest YoY increase since the agency began tracking the data.
In the meanwhile, subprime and deep subprime lending inched up to 20.8% of total loans in 4Q15, compared with 20.3% last year, according to Experian.
Both TransUnion and Experian agreed that the increase in subprime is in line with the overall growth in the auto finance market, and is not a cause for concern yet.
“Lenders now have more confidence in the subprime space, and more consumers have access to credit,” said Jason Laky, senior vice president of automotive and consumer lending business at TransUnion. “They [lenders] have more tools, such as alternative data or means of loan education, to better quantify the risk in subprime.”
While subprime lending will continue to grow through 2016, the pace of its expansion is likely to slow down, Laky added. “Growth is subprime doesn’t necessarily mean we are bringing in extra risk,” he said. “It just means that more customers now have access to loans; if today they have a loan with a buy-here, pay-here lender, now they have a choice to continue through BHPH, but also to switch to traditional lenders.”
Delinquency Rates
The auto loan 60-day delinquency rates increased 6.4% year over year, reaching 1.24% in 4Q15 — the highest level since 2010, according to TransUnion data.
“We still remain in a low delinquency environment, and delinquency rates are manageable,” Laky said. “Consumers have made the auto loan payments a priority, other products they’ll do without.”
Laky suggested keeping an eye on unemployment rates instead. “As unemployment rate moves up or down, it will define which direction delinquency rates will be taking.”
Interest Rate Effect
Rates are the No. 1 issue in the industry this year, according to Wells Fargo Securities economist Sarah House.
House foresees three more interest rate hikes between now and end of 2016, “which will be pretty gradual, totaling to about 100 basis points increase,” she said. “By the end of 2016, rates will be 1% to 1.21%. In the near term, consumers may be looking to lock down the interest rates.”
TransUnion’s Laky said that subprime lending will be most sensible to interest rate changes. “Clearly, interest rates going up is going to affect the cost of funds,” he said. “I expect that average loan terms will continue to get a little bit longer than five years, as lenders try to balance higher costs.” The overall effect of interest rate hikes on individual customers will be “minimal,” Laky added.
No Fear
The talks about a subprime “bubble” continued to wane, but did not disappear completely, Laky said.
“Lenders keep asking themselves, are we creating a bubble,” he said. “Subprime finance is performing strong, and lenders are keeping an eye on it.”
Ally Financial Inc. also touched on the credit bubble during an earnings call earlier this month.
“We spend a lot of time talking to the analyst community and try to understand: Is there fear that Ally is subject to a big credit bubble,” Chief Executive Jeffrey Brown said during the call. The company reported a 24% growth in used car financing in 4Q15, which Brown described as a move toward the non prime space. “We got to demonstrate there’s not a credit fear, there’s not an auto bubble,” Brown added.
