The newest reports are a tale of woe for special finance, which is continually losing ground as banks and finance companies rebalance their portfolios.
The total outstanding automotive loan balance again reached new heights within Q3 2018, hitting a record $1.17 trillion. But while the balance continued its upward trend, the mix of car buyers shifted during the quarter. With many finance resources reassessing their risk-management practices plus an improvement in consumer credit behavior, the percentage of subprime auto loans dropped to its lowest level in 11 years.
Subprime and deep subprime auto loans made up 21.19% of the total car loan market, down 1.5% from the year ago. Alternatively, loans to prime and superprime customers increased from 58.23% in Q3 2017 to 58.79% in Q3 2018.
The decrease in subprime lending has been driven by higher growth rates of lower-risk car buyers within the used-vehicle market. In fact, more than 50% of the used market is made up of prime and superprime borrowers for the first time since Q3 2010.
On the other hand, loans for subprime borrowers comprised the lowest percentage (22.86%) of the used-vehicle loan market on record, while used-vehicle loans for deep-subprime borrowers reached an all-time record low of 4.33%.
Monthly Payments Reach Record Highs
One of the trends that may be pushing many of the prime plus superprime borrowers into the used-vehicle marketplace is affordability. New and used-vehicle monthly loan payments reached historical levels as interest rates continued to increase in the third quarter of 2018. The average new-vehicle monthly payment reached $530, up 6% from a year back. The average new-vehicle monthly lease payment was $430, approximately a 4% increase from last year. Additionally, the regular used-car monthly loan payment hit a high of $381, another 4% increase.
The gap between new and used monthly payments also continues to expand, with the average new-vehicle monthly payment $149 more than the average monthly payment for used vehicles.
Given that many car shoppers base their choice on monthly payment — and with this type of sizeable difference between new and used monthly payments — some customers may opt for the less-expensive vehicle.
Credit Scores and Credit Unions on the Rise
The average credit scores for new- and used-vehicle loans continued to increase, achieving 717 for new vehicles and 661 for used. Average credit scores pertaining to new-vehicle leases rose three point to 724 while new-vehicle loans were also up one point from 714. Franchise used scores improved one point to 683 while the independent space rose three points to 623.
The shifts in portfolio management have positively impacted credit unions, while banks were the only resource to see a decrease in total outstanding auto loan balances. Banks saw the decrease of approximately $1 billion within balances from a year ago, achieving $369 billion. Meanwhile, credit union balances maintained double-digit growth.
Other notable loan balance growth for this period includes captives (up 2.75%) and financial companies (up 5.07%).
30-Day Delinquency Rates Improve
Overall delinquency rates continued to improve, providing an additional sign of stability in the auto loan market. The 30-day delinquency rate dropped from 2.39% in Q3 2017 to 2.23% in Q3 2018. For 60-day delinquencies, rates fell from 0.76% in Q3 2017 to 0.72% in Q3 2018.
While the auto finance market is cyclical, there are various factors that can contribute to shifts within market share, including consumer behavior and vehicle affordability. It’s essential for auto finance sources to keep a detailed eye on these trends to help make the right decisions and help vehicle shoppers find affordable vehicles with the most appropriate terms — while favorably impacting their portfolios.
Melinda Zabritski serves as mature director of automotive credit with regard to Experian Automotive.