<div>In this episode of the Industry Pulse, Melinda Zabritski, senior director of automotive financial solutions at Experian discusses new- and used-vehicle financing trends for the fourth quarter of 2020.</div> <div></div> <div>To view the presentation deck, click <a href="https://www.autofinancenews.net/wp-content/uploads/2021/03/2020-Q4-Auto-Finance-News-Industry-Pulse.pdf" target="_blank" rel="noopener">here</a>.</div> [toggle title="TRANSCRIPT"] Joey Pizzolato 00:01 Hello, everyone, and welcome to the March episode of the industry pulse, a monthly market update on trends in auto financing, credit quality, credit demand, residual values, regulatory compliance, macro economics, and more. It's my pleasure to introduce Melinda Zabritski, senior director, automotive financial solutions that Experian is returning for her second appearance on the industry polls. Melinda, thanks so much for joining us again today. Melinda Zabritski 00:28 Thank you, Joe, I always appreciate the opportunity to join you and talk about what we're seeing in the auto industry. So today, what I'm going to share with you are some of the highlights from our fourth quarter state of the auto finance Market Report. So I've got a lot to share with you. So let's go ahead and get started. We're going to cover off on these four areas, reviewing highlights on overall origination trends, a few highlights on what we saw for new loans, what we saw for us loans, and then we'll wrap up with with overall portfolio balances and delinquency. Now on the right side of the screen, you can see the five different risk tiers, and the associated credit scores used for each of those ranges. Now, every once in a while, I might just use the words or the term subprime, in which case, I'm really looking at the totality of subprime, so it's going to be everything 600 and below. So let's take a look at some of those overall highlights we saw with loan and lease originations. Now, I always like to start off with just an overall snapshot that gives us a nice picture of what we see overall with financing. So we've got a lot of data points on this slide, I'm going to start with the upper left hand side with the percentage of vehicles associated with financing. Now new vehicles saw a little over a 5% decrease in the percentage of vehicles that had financing, it's now at 1.12%. Now, when we did further examine the makes behind these decreases, we really saw it across nearly every single make. So there's no one single make that saw that that really saw a more dramatic decrease then than any others. Now used vehicles saw a bigger decrease with with only, you know, with a 15% decrease, actually, you can see it's 34.59% of used vehicles are associated with financing. So a little bit more cash coming into play in the fourth quarter of 2020 for use vehicles. Now when we take a look at what's happening in leasing, we see on the right side of the slide, we saw that leasing definitely was down for 2020. And we saw it down really throughout the entire year. You know, when the second quarter rolled around, we really saw leasing take a hit and it dropped down to around 26% of the market and maintained in that 26% range, really throughout the rest of 2020. And you could see q4 we ended up with with just over 26% of all new vehicles are leased. Now below that you can see the role of used leasing of total lease and that was also down so we look at all of leasing, we see that used represent a little over 8% of total leasing. Now most of the use vehicles we see that are leased. While Yes, there are some vehicles that are coming off previous leases and go back out again into another lease, the majority of the use leasing do tend to be dealer service cars. Now on the final data point here on the left hand side is when we take a look at all of financing, we take a look at what the role is between New and us. Now obviously, we spent a lot of focus in this industry on new vehicle sales and what's happening with new vehicle registrations, and we know that they certainly were down last year. But when we look at all of financing, we do tend to have a greater portion of overall financing being used vehicles for q4 however it was down it's still the majority of 52% almost 53%. But new vehicles definitely represented more of the finance market for q4 new vehicles. We're now over 47% of everything that was financed. So we take a look at that financing what's happening with share. Now for overall financing This is again loan and lease combine this is looking at new and used vehicles, you can really see the only lender type that really experienced a more dramatic increase in share in q4 of 2020, where the captives you can see there that light blue line and they went from back in 2015 for example, with you know, 26% share and have always been you know, 25 to 27%. There now over 30% of all the financing, banks did lose some market share overall you can see that that is down to around 28%. We have our credit unions lost a little bit of share under 18% now, and then we have another category called other now what you're going to find in other is going to be a lot of Buy Here Pay Here and it's also going to be some of the smaller the smaller lenders that don't really fit the Other definitions, so you might still find some very small finance companies in here, for example, that don't really have very much volume. And they're going to fall into this category. And then our traditional finance companies down to 10% share. So really, captives pretty much picked up the The only real significant share, as it relates to 2020, specific to q4. Now credit scores were also up, we saw overall credit scores increased four points for new you can see they're at an average credit score of 733. used vehicles went up eight points to an average credit score of 671. And you can see that over the last several years, we have been steadily increasing the average credit scores, however, 2020 really accelerated these trends. And they really accelerated the trends as it relates to the decrease in subprime. Now, again, we look at the distribution of overall financing across the different five risk tiers, you'll notice that the trend for subprime decreasing has been a steady one. But again, q4 really accentuated it. Now with only 1.98% of the total originations in q4. Being deep subprime, we are at a record low, further their combined 600. And below, so again, that total subprime is only 16.3%, which is another record low prime and higher. So those top blue stacked bars, prime and higher is over 66%. And last year, it was around 62%. So definitely growing that Prime portion, and back in 2016, prime was under 60%. So we continue to see that increase, deep subprime is down, he said, over 41%, subprime is down 13% prime is relatively flat. But again, this, this decrease in subprime has been a trend that we continue to see. And again, really accentuated in 2020. So now let's take a look at a couple of highlights as it relates to specifically new vehicle financing. And we're gonna start off with a with a very similar slide to what we just saw previously. So let's look at those risk distributions. Now, new vehicle loans and new vehicle financing have always been very, very prime. Now this is looking just at new loans. And deep subprime have reached a level similar to what we saw back in the recession. Now, what we're sharing here goes back to 2016. But again, when we go all the way back to the recession, we see that we're at very similar distributions for the subprime and deep subprime subprime sectors. Now in q4 of 2020, deep subprime is only point three 6% of new vehicle loans, and that's down over 50%. So again, we continue to see the market contract more with more loans being represented in the prime portion of vehicle financing. Now, as far as our loan attributes are concerned, we again just hit some some record highs and many of the loan attributes. Now we have on the left hand side, we have the average amount financed, and the average new loan amount is up about 19 $100, actually 1900 73. And we can see we're at $35,228 for the average new loan amount. Now that is not a record high record high for new vehicle lending was in q2 of this year when we had a big shift into full size pickups. Now for q4, we're kind of back into those SUV cu V's and that did bring the loan amount down a little bit from earlier this year. But as you can see, it is up higher than what it was last year. And it's up about the same amount as it was in 2019 year over year, monthly payments for leasing decreased to dollars, it's now at $460 for an average new lease. And our average new loan amount or average new loan payment, however, is at a record high loan size $13 increase weekend record high $576. Now rates did fall, you see that on the lower left hand side 94 basis points rates are down to 4.31%. And our terms decreased slightly for leases and increased for new loans to 69.68 months. And also it is not quite a record high again, we had that in q2. So despite lengthening terms and decreasing rates, we're still seeing those increases in monthly payments, in part again driven by some of those increases in the overall loan amounts. So let's look at some of those same patterns for used vehicle loans. And again, we're going to start off with these risk distributions. Now. The percentage of use loans originated in deep subprime and subprime have also reached some all time lows for used loan risk distributions. And again We've seen this trend in the past several years with 2020. Definitely a sharper decrease than prior years. But again, it's been steadily declining. Now prime plus is at 55, almost 55 and a half percent of us lending. And last year, it was just over 52%. So again, more and more of the industry is being made up of these prime loans. Now, another trend that we saw in 2020, was a disruption of something that we've been seeing over the last couple years. And that has been increasingly especially prime consumers, increasingly shifting more into used vehicles. And that very likely goes hand in hand, with the prior increase in leasing. As we have more of these late model used vehicles returning to market, we especially have more prime consumers shifting into used and taking advantage of those vehicles. Well, 2020, the shift started in the second quarter started seeing a lot more incentives coming around. And we saw those, those prime consumers jump back into new vehicles. And if you take a look at super prime on the far right hand side of the screen, you can see here in 2018, that green bar, super prime consumers purchased us vehicles 46% of the time, last year old 2019, it moved up to over 47%. Well, this year, it dropped back down and dropped back down to 44%. So lower than it's been in the last couple years, you see a very similar pattern for prime and for near prime, even a little bit for subprime. Now, deep subprime consumers, of course, are majority, the majority of the time they do purchase use vehicles. And that trend continued and actually increased for those consumers in q4. It'll be interesting to see if this trend turns itself around again, and we see consumers moving back more into us. But then again, we also know that there is increasingly inventory challenges. And of course, those reduced vehicle sales in the in 2020 model year will continue to impact the industry just as it did back in 2009, when we had low inventory of the 2009 model year vehicles. And then we're going to take a look at what's happening with the loan attributes for used vehicles. Again, looking at those loan amounts continuing to increase we did hit a record high for the use loan amounts, increased over 16 $100 to 22,004 67. Again, record high, this did drive the monthly payments to pass the $400 mark and it passed it for the very first time, those payments went up $18 to 413. And meanwhile, we did see rates decrease just like we saw a new decrease 62 basis points to 8.43. And we hit a record high for us loan terms at 65.58 months. So while it's new didn't hit the record high on term, we definitely saw it for used vehicles. Now lastly, let's take a look at just some of the overall market conditions. And well, despite vehicle sales being challenged in 2020. We did have overall portfolio growth of almost three and a half percent. Now balances increased $42 billion to 1,272,000,000,000 and outstandings in automotive balances on nearly 79 million loans. Now nearly all lenders saw an increase with banks who do hold the largest balances of 381 billion, they did experience a very slight decrease. That decrease was was was was about point 08 percent captives were up 6.2% you know credit unions also the second largest balance holders were up 1% and finance companies experienced an increase of just over 10% 243 billion. So lastly, taking a look at our automotive delinquencies. delinquent loan balances decrease year over year as some of the accounts do continue to remain in deferment, you can see that the overall percentage of balances that are 30 days delinquent are at 1.73%. And the overall balances that are 60 days delinquent are at point five 9%. So overall, seeing delinquency really continuing to remain in check. But again, it's still being impacted by some of those loans that remain in deferment. So just to wrap up some of the highlights for q4 you know leasing remains low yet. Overall financing, you know overall did decrease for Oprah leasing against subprime continue to see some of those record lows, loan amounts, definitely continuing to see those loan amounts grow. And again, those use payments over $400. But again, despite a very challenging year, we did see those loan balances grow. So with that, thank you so much, and Joey back to you. 14:56 Great things Joey Pizzolato 15:00 do you have a moment absolutely you know first one thing that we talked about a lot you know endemic was this issue of affordability concerns and you know went into the fact that you know payments are going up so i'm wondering you know how as as the industry continues to recover how much should we like revert back to to you know being worried about about those affordability concerns Melinda Zabritski 15:30 yeah i think affordability definitely continues to remain very top of mind for really for the entire industry you know especially leasing we definitely saw leasing come down and that's that's been a way on the new vehicle side that has made those new vehicles a bit more affordable you tend to see you know average payment differences of well over $100 when comparing the same vehicle on a loan versus a lease so for new car buyers leasing definitely remains an option to make things more affordable use vehicles those payments you know hitting just some record highs that will i think be an issue not necessarily an issue but that will certainly be a topic that will be top of mind i think for the coming years especially as we've really shifted to those suvs and cu v's in today's market which of course that becomes the use vehicle of tomorrow so you know inventory of some of the smaller cars is something that in the future will be more tight and certainly resulting in some of those higher payments so certainly affordability definitely top of mind in the coming coming years Joey Pizzolato 16:34 great great you kind of touched on it you know on that last slide but i'm just going to ask you to repeat it again um you know if you had if you had like top three takeaways from today's discussion you know what would they be for our listeners viewers Melinda Zabritski 16:49 definitely so the last point affordability definitely a takeaway you know it continues to be a concern you know we talked about the shift in leasing what's happening with us vehicles so of course affordability definitely a concern and something to stay focused on a second point is you know the industry is resilient you know despite a very turbulent year we've grown our portfolio balances you know we had over you know almost three and a half percent growth and balances so definitely shows the strength of this industry you know we were one of the first segments to bounce back after the recession and we you know bouncing back strong despite a very challenging year and i think we'll continue to see to see that growth and then lastly you know in addition to its resilience the industry is cyclical you know 2020 accentuated the cycle with some of those really strong and greater reductions in subprime you know but as we continue to navigate this recovery i think we'll see some of the typical expansion and contraction with growth again in the subprime segments you know so of course we always recommend you know folks stay close to the data you know a lot of these insights you know to help us navigate this recovery and bring about a stronger 2021 Joey Pizzolato 18:02 great well melinda thank you so much for joining us today it's always a pleasure to have you on next month's industry pulse will feature features such as emergent general manager and leader of transunion automotive line of business and melinda will be returning again in september for her third appearance on the industry pulse but to all our viewers thank you so much for joining us you know we'd love to hear from you you know shoot us an email at info at auto finance news.net and thank you again for joining us and we'll see you here next time [/toggle]
