In this episode of the Industry Pulse, Melinda Zabritski, senior director of automotive financial solutions at Experian, discusses second-quarter finance trends against the backdrop of the COVID-19 economic crisis. To view the presentation deck, <a href="http://www.autofinancenews.net/wp-content/uploads/2020/10/Auto-Finance-News-Industry-Pulse_Experian.pdf">click here</a>. [toggle title="TRANSCRIPT"] <div class="transcript-scroll-box">Joey Pizzolato 00:01 Hello everyone, and welcome to the third episode of our new series The industry pulse, a monthly market update on trends in auto finance. The industry pulse features a rotating Faculty of six industry experts that will give twice annual reports on crucial market market topics such as credit quality, credit demand, residual values, regulatory compliance, macro economics, and more. It's my pleasure to introduce this month's speaker Melinda Zabritski senior director automotive financial solutions that experience he or she is responsible for implementing products and services specific to the automotive credit and lending industry. She also serves as experienced primary analyst and spokesperson regarding key automotive finance trends. Throughout her career with experience brisky has overseen the product management of experience for experienced automotive lending channel as well as the marketing strategy for the development of experienced automotive credit vertical sales channel. Prior to joining Experian in 2004, Zabritski held various product management and analyst positions in the credit industry where she managed and developed credit risk models and marketing and market trending and forecasting tools. Melinda, thanks for joining us today.Melinda Zabritski 01:17 Great, thank you joy. It's pleasure to be here. So today's presentation, I am going to review our automotive finance trends that we've seen throughout the second quarter of this year. And of course, there's a lot of focus and a lot of emphasis on what we're seeing happening to the industry with with the impact of COVID. So I will certainly cover that as well. So I'm going to look at some overall financing trends and then split that between some impacts on new vehicle loans and leases. We're going to spend some time looking at the used vehicle market and then again, some monthly insights. So what has happened essentially year to date, from January through either a June time period or July, the most Recent data we can possibly share on the industry. And we're going to look at how lender market share has changed how volume has been impacted. And then of course, those financing trends that have been impacted as consumers have returned to the auto market. I do use five risk tiers when analyzing the industry. You can see this credit score ranges associated there are two, four prime, I have a super prime tier, a prime tier, non prime, sub prime, and then deep sub prime. So let's get started a lot of good information to share with you for the this presentation. So I like to start off really just giving an a high level look at how the auto finance industry has changed over as you can see a 12 year time period. So we began really tracking the trends in the industry starting back in 2007, and 2008. So wanted to give us as long of a period view as I can. So what we essentially have seen is a rather dramatic increase in especially the loan amounts. And so we're seeing here are the average attributes of loan amounts, monthly payments. for the long term and the rates for both new and used vehicles over this 12 year time period, so we start on the left hand side looking at what's happening with new vehicle, new vehicle financing, we have had a 53% increase in the average loan amount for a new car. So q2 2020, we hit an all time high of over $36,000 being financed, you can see it's a 53% increase, however, the payment will up significantly, is only up a little under 30%. That average new payment is now $568. It was well in that mid $500 range. It didn't go up as much as as a percentage as much as financing because as you can see below that we have a more significant increase in our average loan term. Average new loan term now is over 71 and a half months and you can see again 12 years ago it was 63 and a half months so a pretty significant increase. And of course second quarter, we do have a little lowering interest rate. We've been seeing the interest rate, of course come down so far this year. And as you can see, it's certainly below what it was back in 2008. Now used cars have also had some large increases, they haven't increased as dramatically as what we have seen in new cars, used cars average loan amount is up 28% you can see it's approaching $21,000. Now that is used across all dealer types. So that's going to be every model year of a used vehicle that has been financed regardless of if it's being sold by a franchise dealer or an independent dealer. So that's going to be you know, the entire used car market that has been financed. So that is up 28% the average monthly payment is approaching 400. If we do isolate out and look just at franchised monthly payments, that is over 400 so used up 16%. And as you can also see that used loan term certainly rose we're now over 65 months, and that loan rate is a little bit lower than what it was back in 2008. So still in at 9% range for the entire US market. Now, because a lot of these, these increases have been rather dramatic, it really has been caused by a fundamental shift in what consumers are financing. And q2 of this year actually resulted in an another change. For the past couple years, consumers have been increasingly financing those CVS, the CVS up category had been the number one segment for about two and a half years, q2, full size pickups came back and as you can see, they've edged out that CV, it's now over 20% of financing, that's gonna be loan and lease, over 20% of financing and q2. But compare that back to 2008. This is what has led to that very dramatic increase in the average new loan amount. So back in 2008, the number one finance vehicle segment for new cars was a small economy car it was about 17% of the population then You can see there's other there's cars and full size pickup has always been in the top five. But back in 2008, it was ranked number 311 percent. Now it's 20%. Now look below that, look what's happened to those loan amounts. So that number one segment back in 2008 generated an average loan amount of only $17,000. That full size pickup was only $29,000. Today that full size pickup has an average loan amount of over $46,000. So just that trend alone, the shift to full size pickup trucks carrying significantly higher average loan amounts because of course, the vehicle prices are significantly higher, has led to a pretty significant change in q2, which we'll take a look at shortly. So because of these issues and affordability and these longer term loans, or these larger loan amounts, the market has also fundamentally responded by generating longer term loans. So if we take a look at the percentage of loans both new and used by some of the more Commonly originated loan terms, you can see the percentage across each loan term on this chart. Now the top of each stack bar is the percentage of loans right between 73 and 84 months. Now, as you can see, this chart goes all the way back to 2008. So these longer term loans are not new, they've been around for a while, however 2008 it was only 10%. Now we're over 26%. And notice, again, the very large increase from last year to q2 of this year, where those loan terms were at 23%. Now it's over 26%. So that's where the more significant growth has been occurring is in the adoption of those 73 to 84 month loans, big change in the second quarter of this year. Now, another trend that we had been seeing up until this year with with the impact of COVID. As part of that response to affordability and some of the changes in the market is of course we have seen more consumers move into leasing as you can clearly see from 2014 in the second quarter. Quarter, all the way up to last year, leasing had been in the 30% range. Historically, you can see before the recession, it was, you know, 23 24%, it had always been around a quarter percentage of new vehicles that needed financing were done. So as Elise, last couple years it was approaching. As you can see the upper and mid range 35% of new vehicle financing on the consumer side was associated with a lease. Now again, I want to point that out, all of this is consumer related. The commercial fleet government transactions are not included in this presentation. So we're really only looking at consumer behavior here. So again, COVID hits, second quarter of this year, we see leasing drop off quite a bit, and we get into the COVID section, you'll actually see exactly when and we're starting to pick back up again in July. But leasing right now 26% COVID also reversed another couple trends that we had been seeing, the second of which is illustrated in the bottom of the page and that's the percentage of prime plus concern. tumors who are financing used vehicles. Now as you can see before recession, you would see a prime prime credit consumer purchasing and financing used vehicles only about 46% 47% of the time during the recession and increased a little bit of course, we hit that peak of the recession in 2009, particularly third quarter of 2009 for auto anyway, and then you can see we started to those prime consumers shifted a little bit more into used vehicles as that percentage dropped down. And then over the last couple years, as the rate of leasing dramatically increased. We saw more of those prime consumers shifting into us taking advantage of that good quality off leased vehicle that late model used vehicle. And we saw more of those consumers purchasing used COVID reverse that trend. So the second quarter of this year, while we still have those prime consumers purchasing used are 50% of the time, it's now under 55%. So that did drop down quite a bit as you can see year over year. Now specifically the new vehicles I want to share a future trends that we're seeing as it relates to new financing, first of which is market share. Now, q2 also was a very dramatic shift in in financing share among the lender types. In the second quarter, the captives really just pulled ahead, of course, we had very strong incentives out there. This was of course, part of what pulled that Prime consumer back into new, they got pulled back into new and they financed with the captives. Second quarter, those captive market shares you can see was over 61%, you can see we're showing back to 2016. Some of that gradual change. banks were one of the the bigger impact of losing market share in the second quarter, they dropped down to just under 24%. Credit Unions also lost some market share. And then finance companies also came down. Part of which of course, was some of the reduction in subprime financing, which as finance companies, mostly financed subprime. So as far as average credit score We did see a bit of a sharp increase in the average credit score for the second quarter. So you can see the trend going back to 2016. The lease average credit score was up five points your year to 729. The average new loan credit score was also what five points was 718. And then blended. That brings us to an average credit score for new financing to a 721. So a little bit more sharp increase on what we saw with average scores for new. Now, part of that, of course, was the shift away from subprime. Now volume was impacted across all risk tiers. But what we're looking at here is the distribution of the financing across the wrist tier. So where as volumes down for everybody, it wasn't down as much for the prime consumers. So we do have subprime at an eight year low. Especially if you look down at that deep subprime for new vehicles, it is now only point three 7% of financing more comparable to what we saw back in the recession, as we still have the higher rates of that Prime portion of financing, as well as subprime. So prime being the the blue bar, the light blue bar, and then that nonprime kind of right in the middle as that purple but overall, the new subprime loans are at an eight year low, again, not quite as low as where we were, as we were coming out of the recession and lenders were still rather tight. We're not we're just really on a on a low for subprime. So you can really see that impact in new vehicle financing. Now as far as us cars, let's take a look at the market share. So market share for used vehicles. The largest share among the lender types are the banks. They however, are down for used vehicles as well. It's a year every year they've dropped from 36% to just under 35%. Credit Unions also down the finance companies are up a little bit up to 18% share and you can see Buy Here Pay Here also picked up a lot Little bit of share there as well moving to 13% and then finally we have the captives also picking up some of that increase share on the used vehicle side to now 9.2% So, not as dramatic of a shift on the used vehicle side as as far as share is concerned. But again, we still have those increases really occurring with the finance companies, the captives, and the and the the Buy Here Pay Here space. Now credit scores in USD also not as dramatic of an increase in as we saw in new vehicle financing, but we still have those average credit scores increase. So here I've split it out between the franchise used in the independent use because of course, the franchise use is going to attract a little bit more of a prime consumer with more late model used vehicles, whereas the independent used will of course, carry a more widely distributed credit consumer. And you can see that average credit score for independent use is actually down a little bit. We see it up slightly for franchise and then all used is Have one. So one of the reasons it's not as dramatic of an increase is, of course, because that Prime consumer shifted a little bit more into new vehicle financing. So that kept the shift in credit scores a little more level. And that also had a bit of an impact here in these risk distributions. Now, despite those prime consumers, and you can see your year the percentage of super prime is down for use vehicle financing, that's all the way on the right hand side are super prime is down to under 12%. prime is up a little bit. So that's what we're seeing some of that growth is more in that that that average prime distribution, but then deep subprime is also being impacted quite a bit on use vehicle lending. And you can see it's down to 4.35. So again, quite a bit different from what it was during the recession even and prior to the recession. So as a percentage, quite a bit low. So again, that that was a bigger impact that COVID has had in the second quarter are some of those risk distributions. Now I do want to spend some time now wrapping up looking at very specifically how the year has progressed. month by month I'm going to start off looking at volume. So what we're seeing here is the top chart is a stacked bar between new new records and used transactions month by month of the volume. So this is in thousands. And as you can see your every year January we were up a little bit in total units. And you can see again New And Used were both up the chart below that shows the year over year difference. February rolled around and year over year, we had new transactions were up slightly used for a little bit low, March. huge impact you know the market just fell off considerably on the new vehicle side is about 37% used. volume was in half April, both were severely impacted. Of course, we have all the stay at home orders many dealers had to close. In May volume starts coming back a bit you can see we started to recover very quickly. So a little similar to What we saw with the recession where auto recovered very, very quickly compared to some of the other industries, here auto is also recovering at a at a pretty nice pace. You can see we're still off compared to 2019. June rolled around us vehicles are actually we're actually up year over year, July, we're both down new is off, little under 20% is the 18% volume used, however, is still a little bit on par with where we saw last year at this time, off about 5%. And of course, August through December. The data is not fully compiled yet from all the registration and the titles. So starting to recover, but still we're expecting things to of course, remain soft. And I know there's been a lot of SARS that have been published over the past, you know, many months I think with the average being around 13 644 new. So some of the other impacts of course, were relating to how consumers were financing. And what we're doing here is breaking out cash lease loan. And of course we saw for the entire q2 leasing was pretty significantly impacted. And the chart below this shows the year over year change by transaction type. And what we can see here is we began the year with loans being a little bit down year over year, leasing started to come down from where it was last year. Last year, we had much higher rates of leasing, we still had leasing as you can see, though, you know, upper 28% 29 30% for the first quarter, cash was even up, cash was up year over year, second quarter starts rolling around and one of the bigger impacts COVID had was of course, we see leasing drop off significantly, you know, in 20% 22%, you know, almost 19% The other thing that dropped off considerably, as you can clearly see is cash. So cash was down quite a bit. We started to get a little bit more cash coming back into the market in July. And again, you can see that leasing starting to come back up again in July as well as a percentage as we if we include cash. It's at 27 percent, we take cash out and look at only leasing as a percentage of loans and leasing. It's back to around 30% for July. So as a percentage, it's looking back on track to where it had been last year, a little bit softer from last year because again, last year was in that that upper 30, or the 33 34%. But it's better than it had been in the first quarter and the second quarter, of course, volume still being impacted. Now, again, I pointed out, I got ahead of myself there. So as you can see, July leasing, we're back at 30%. year over year, it's still soft, but 11%. But again, you can see we're starting to return back again, as stores can be open, consumers can get back out there and start transacting. So leasing looks like it's getting a little bit back on track. Now, I like to spend a little bit of time here because there we try to draw some correlations and everyone's trying to understand the impact of COVID on the industry. And we all keep going back to look at the great recession and say well, are we going to follow those similar patterns and it's tough to say because This is just completely unprecedented. We've never had a situation where the dealers had to close. We've never been told to stay at home. We've never been in a situation where we could not transact. Whereas during the recession, of course, those consumers who want to transact sometimes they couldn't because lenders, some lenders didn't have funds to lend. So very different situation, from a credit quality standpoint, or as far as what was on the books, what had been originated very different from today versus back in 2007, and 2008. So what this is showing you on the left hand side are the quarter the originations by quarter leading up to the Great Recession, the percentage of originations of deep sub prime and subprime only, and then the quarters leading up to COVID. The credit credit quality of what was being originated now most loans that are going to go delinquent will of course, go delinquent typically, you know, at between 1822 months, you know, credit scores predict delinquency within the first 24 months or within a 20 four month window. So most delinquency again occurs within that window. So that's why I was narrowing it down to these quarters. And as you can clearly see the credit quality of what was being originated in deep subprime, subprime is considerably different. So the last several quarters leading up to to this time period, the deep subprime which is where most of the delinquency will occur, is under 3%, or is under 4%, rather, and now it's under 3%. We've never really seen it under 3%, for deep subprime. And then as you can see, prior to the recession, those ratios it was you know, 5% 6%, almost 7% in the first quarter of 2008. We're originating a very different credit quality. So as we can see the average credit score of what's been happening this year. Of course, the industry is very cyclical, you do tend to see the credit score come down during the first quarter usually starts to come back up again as we move into the second quarter. And as you can see year over year on the left hand side, the light blue bars 2019 the dark Blue is is 2020. And you can this is where you can really see in the second quarter, that sharp increase in that average credit score, especially in June. So the distributions also you can really see in June that deep subprime really represented a much smaller part of the industry. So again, everyone was impacted by volume, but those subprime consumers are impacted by volume a little bit more severely than the prime and the non prime consumer. And then you can see the year over year difference below that again, that subprime percentage really falling off in June you every year it was off 30%. So big difference there. Now on us vehicles, not as dramatic of an average credit score change, we ended up in June, very similar score, you can see your every year only modestly shifted than our risk distributions for used vehicles. You can also see again, that subprime was off not as severe as what we saw for new vehicles. So again, part That again being because some of these you consumers who would have previously purchased used vehicles that were prime and bolstered up that percentage of prime went back over into new, so not as impacted on the use vehicle side. And then lastly looking at the credit characteristics, this is where as I pointed out at the beginning, that shift to full size pickup trucks is so evident here. So if we look at the average loan amount and the dark blue bar, our new vehicle loans, the average loan amount first quarter was all in that $33,000 range second quarter. As those pickup trucks became the number one segment that loan amount jumped up $3,000 to now a range of $36,000. We ended June at 35,000. The impact on monthly payment we can see the monthly payment whereas your year was more significantly as we look at it throughout the year. The change isn't as big now in in April, it was a little bit more of a significant increase. But take a look at may take a look at March and Same monthly payment 565. But in March, the average loan amount was 33,007. In May, it's now $36,000. So a more significant monthly payment increase. And of course, the reason it's flat is what's happening below that average loan term jumped up as you can see an APR over 72 months on average in May compared to march against a monthly payment 69 months on average versus now nearly 72 months. And of course, those interest rates also fell in March was 5.75. In May, it's now 5%. So consumers have really been benefiting by those incentives, and by the fact that they were taking advantage of those long term loans and that dropping rate, so essentially, consumers in May were able to get a little bit more bang for their buck and still keep that monthly payment flat. And of course, lower monthly payments always are associated with a greater likelihood of those consumers remaining current On their payments. So lastly, just to wrap things up for the second quarter, we certainly saw that captive market share rebound as more of those prime consumers shifted back into new leasing still remains low year to date, we're starting to see it recover a little bit more as we get a little bit of a sneak peek into q3 with July. credit scores. Certainly saw those scores increase, as subprime really reached some of those record lows. And I think the bigger impact we've seen in the second quarter is that shift back to full size pickup trucks, you know, getting back to that number one vehicle segment had a very significant impact to all the trends that we saw, you know, impacting those loan amounts and, and those longer term loans helping keep keep those vehicles able to be purchased. And then of course, the COVID impact on the industry. We're starting to come back but it we're still certainly soft. And and again, seeing that impact of the incentives. And of course as those incentives are are falling off as we do start looking at market share. The more recent months of July, for example, we're starting to see banks pull market share back again, as those incentives start rolling off. So with that, Joey can turn it back over to you.Joey Pizzolato 25:13 Thanks, we'll enter those. Great. Um, I have a couple questions for you. Um, first, you know, as you mentioned, um, you know, we've been watching a lot of changes in the market from, you know, reaction to COVID. So, I'm wondering that, you know, we've we've kind of been in this predicament now for going on six months, do we have any inclination as to kind of which, which trends might be around might be sticking around for like, the long term and which might, I'm on the other side of the coin, which might, you know, kind of really just be a product of kind of the unprecedented times that we're in right now.Melinda Zabritski 25:49 Yeah, so one of the trends that I do expect to see turnaround more of just the the immediate reaction to the industry, are those very strong shifts for subprime. You know, the industry Of course, always very cyclical, we're going to see subprime grow, we're going to see it reduce, we should, in the near future, see it start to come back. I think also, again, you had very likely more consumers who were subprime being impacted more significantly with unemployment rate. So as of course, unemployment rates come down, we'll also likely see some of that growth again, in in those risk distributions. One of the things I don't expect to see go away anytime soon, are those long term loans, you know, you could see from that, that trend line, we continue to grow those. And again, as consumers shift into these more expensive vehicles, those longer term loans really are necessary. You know, if you run, if you take the average loan amount of these, you know, $36,000 loans and even using average rates, if you were to finance that at a 48 month term, it's, you know, I think like eight or $900 for a monthly payment, it's just not affordable. So until consumers or if they ever shift back in To less expensive vehicle segments, I don't expect to see those those loan terms really go away anytime soon.Joey Pizzolato 27:08 Hmm. No, that makes sense. Um, definitely follows. So, you know, just to wrap up, um, maybe if you just give us top three takeaways, or four or five, you know, whatever is most important for our audience to kind of take away from from your, your presentation today.Melinda Zabritski 27:25 Sure, absolutely. So I think definitely COVID has had, as we all know, a very significant impact on the industry. However, auto does appear to be rebounding, we would expect to see that still remain a little bit soft, but certainly that volume is coming back. I think the one of the huge impacts in q2, again, was that shift to those full size pickup trucks because it has that has such an impact to the rest of the industry. It carries over. It's why we have these very large loan amounts. It's why we have to have these longer term loans and and it really does carry over it's going to result Very large portfolios for our lenders from from a total balance standpoint. So again, that shift in what consumers were buying, it has really had, I think one of the bigger impacts to the industry overall. And, of course, those those loan terms, certainly a good takeaway there. And, you know, obviously, I think, you know, as an industry, we need to make sure that we're staying on top of these trends and, and these data points so we can help make the best decisions, you know, as lenders to help support the consumers and generate their transactions and give them the buying power that they're going to need. Joey Pizzolato 28:34 Great. Well, Melinda, thank you so much, again, for joining us today. It's always a pleasure. talking with you, um, Melinda will be back in March. I believe that I think that's six months out if I can do math. Um, so please be on the lookout for that. And next month, we will have Satya on merchant Senior Vice President and automotive line of business leader at TransUnion. And finally, for all our viewers, we'd love your feet. Back on our new series what market trends are you most interested? interested in? What did you think of this episode, please shoot us an email at info at auto finance news dotnet and thanks for joining us and we'll see you next month. </div> [/toggle]
