Lenders Trade Subprime Borrowers For Longer Loan Terms, Experian Shows

Loan terms continue to rise and increase lender risk due to an environment of softening used vehicle values, Experian’s third quarter State of the Automotive Finance Market report shows. 

Loan terms stretching 73 to 84 months grew to nearly 31% of all new loans compared to 27.5% the year prior, the report finds. Used loan terms of the same length also grew to nearly 18% up from 16.2% in 2015. Furthermore, 85+ month new loan terms grew to nearly 1% compared to 0.71% last year. 

While longer loan terms decrease the monthly cost of the vehicle, average new car prices also have climbed on a year over year basis, according to Kelly Blue Book. The estimated average transaction price for light vehicles in the U.S. was $34,948 in November, up $581 — or 1.7% year over year, according to KBB data.

Meanwhile, the average new car loan amount jumped to $30,022 compared to $28,936 the prior year, Experian found.

Since used vehicles are declining further than originally anticipated, if borrowers were to default on their loans, lenders would be stuck with repossessed vehicles that potentially wouldn’t recover the unpaid amount on the loan term at auction, the Wall Street Journal observed.

After 10 consecutive months of rising subprime loan originations, financing to subprime consumers (defined as Ficos between 501-600) fell 4.5% year over year, while contracts to the deep-subprime tier fell 2.8% to reach the lowest levels since 2011, according to Experian.

These decreases in subprime are inline with signs of tightening lenders exhibited during third quarter earnings calls earlier this year such as Ally Financial Inc., Consumer Portfolio Services, Capital One Auto Finance, and General Motors Financial all stressing a tone of caution in the space.

However, it seems that tightening was also accompanied by extended loan terms. Chase Auto Finance is latest major lender to commit to backing off 84-month terms, the company announced in September.

While Experian reports the percentage of loans and leases 30 days past due remained flat year over year, the New York Fed’s Center for Microeconomic Data observed subprime delinquency rates in particular have risen above 2% for the first time since 2010 in the aftermath of the great recession.

While all of these signs point towards an eventual downturn, Experian’s data also shows portfolio balances reaching record levels, as loan amounts grow to all-time highs.