Despite auto originations climbing back to near pre-pandemic levels in the third quarter of 2020, subprime loans continue to decline amid tightened credit standards, inventory shortages and dwindling demand.
Auto originations measured on the TransUnion Industry Insights Report for the third quarter of 2020 totaled $7.32 million, a decline of 2% from the same period a year ago. However, subprime originations decreased 21% year over year to $860,000, despite an 11% quarter-over-quarter increase. Subprime originations logged subsequent declines at the end of 2019 and beginning of 2020, according to TransUnion.
In the fourth quarter of 2020, subprime share fell to its lowest level in Federal Reserve data dating back to 2004, with originations falling 9.7% YoY, Jonathan Smoke, Cox Automotive’s chief economist, told Auto Finance News.
Subprime has been losing market share due to lenders tightening credit standards amid the COVID-19 economic crisis, but the decline can also be attributed to a decrease in vehicle demand from subprime borrowers as many people still are without work, Satyan Merchant, senior vice president and automotive business leader at TransUnion, told AFN.
“We found there was less demand for these subprime originations; maybe subprime borrowers weren’t showing up or just weren’t ready to finance vehicles,” Merchant said. “It’s both a demand and supply issue.”
A rise in new-vehicle incentives from OEMs during the third quarter also contributed to a decline in subprime share as borrowers with lower credit scores typically turn to used vehicles and aren’t necessarily eligible for lower interest rates, Merchant told AFN.
In some cases, too, the used car wanted by a subprime borrower simply wasn’t available as inventory continues to be tight, and used-vehicle prices remain high, Merchant noted. For used-vehicle purchases, the average amount financed increased 5.2% YoY in the third quarter, the highest growth rate in five years, he added.
“We already had a world where vehicle prices in general had been creeping up over the last five years, but this last year was a bigger surge of increase,” Merchant said, noting that longer loan terms and lower interest rates contribute to lower monthly payments. The average loan term of 65 months is one month more than in 2019, he said.
Meanwhile, credit performance deteriorated at a higher rate for subprime auto loans. The delinquency rate for all auto loans 60-plus days past due came in at 1.57% in the fourth quarter of 2020, an increase of 7 basis points YoY, according to TransUnion. In the subprime market, 60-plus day delinquencies accounted for 9.05% of loans, an increase of 164 bps from the prior year.
“There are certainly consumers who are still struggling, and we’re seeing that they’re not showing up to purchase or finance vehicles. Some of them are struggling in terms of keeping up with their payments,” Merchant noted. “The auto lenders who adapted to the needs of borrowers managed their risk fairly well.”
Several auto lenders use alternative credit data and digital lending tools to manage risk more accurately, Merchant added. Auto credit access improved in December 2020, but remains 5% tighter compared to 2019.
“While things aren’t back to pre-pandemic levels, (auto finance) is a resilient industry,” Merchant said. “At the onset of the pandemic, things really dipped in terms of origination activity, and it didn’t take that long for the auto industry to really recover.”
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