Late payments on direct auto loans shot up 98 basis points in the first quarter — nearly 50% — the highest jump for any asset class tracked by the American Bankers Association.
First-quarter direct-auto delinquencies were 3.01%, compared with 2.03% in the final quarter of 2008.
In general, ABA Chief Economist James Chessen said the higher delinquencies are a result of rising unemployment. “The No. 1 driver of delinquencies is job loss,” he said, adding that “delinquencies won’t improve until companies start hiring again and we see a significant economic turnaround.”
What’s interesting, though, is that indirect auto delinquencies fell 11 basis points, to 3.53%.
I’m not really sure how to explain the discrepancy. From the first quarter of 2000 through yearend 2008, direct auto-loan delinquencies averaged 2.09%. Until last quarter, the highest-ever delinquency rate was 2.56% (in 3Q01).
There’s been some discussion on this site about the fact that direct lending is less risky than indirect. But maybe this new data turns that discussion on its head.
What is the difference between direct and indirect auto loans?
Direct loan is attained by going directly to the lender and applying instead of applying at the dealer.
So if I directly apply to GMAC bank and get a loan, it will be direct. But will be indirect if I apply at dealer site and approved by GMAC later. Shouldn’t the underwriting be same and therefore same credit risk? Agree that applying at dealer may be subject to higher risk of manupilation.
Direct is when you go to your local bank and they approve you for a loan in a specific amount based on the specific vehicle you want to buy. Indirect is when you go to the dealership, choose the car, fill out the paperwork, and the dealer says: “Here’s the best loan for you.”
As far as credit risk, often the thinking goes that people who are proactive about their loans, i.e., completing an app before they get to a dealership so they have their financing in hand (much like getting prequalified for a mortgage so you know your maximum negotiating power) often have higher credit scores than those who opt for indirect financing. Also, when financing occurs at the dealership, the dealer could potentially mark up the customer’s rate. The higher the rate, the greater the chance of default.