Auto lending is at record levels thanks to low interest rates, available credit and competition among lenders.
“Banks really are getting the loans out,” says Marty Miller, a senior product marketing manager for credit-data tracker Experian Automotive.
His firm says the latest outstanding automotive loan balances have reached a record high since the company began publicly reporting the data seven years ago.
Outstanding balances reached $782.9 billion in the third quarter, up $103 billion from year-ago.
Thirty-day loan delinquencies dropped to 2.58% from 2.67% during the same period.
“The combination of higher loan balances and relatively flat loan delinquencies is good news for everyone connected to the automotive industry, including consumers, lenders, retailers and manufacturers,” says Melinda Zabritski, Experian’s senior director-automotive lending.
“The availability of credit, combined with consumers’ continued strong performance repaying their loans, has a positive spiral effect,” she says. “It allows lenders to slowly but surely take on additional risk, while providing more access to loans and paving the way for higher auto sales.”
The auto industry is credit-driven. Vehicle sales plummeted in 2008 and 2009 largely because of a credit freeze that accompanied the recession.
Subprime lending was especially hard hit, as lenders did business with and offered relatively affordable rates only to the most creditworthy of auto shoppers.
But subprime is making a comeback, accounting for about 16% of auto lending, says Deirdre Borrego, a J.D. Power vice president.
She warns against aggressive lending that could spur defaults. However subprime auto financing did not come close to the subprime mortgage industry's recklessness that sparked the financial crisis in 2008.
Many people who recently experienced financial hard times are rebuilding their credit, starting at the subprime tier, Borrego notes.
“The auto-finance market is doing well,” Miller says at the National Remarketing Conference in San Diego. “The number of loans is increasing, charge-offs are low and rates are affordable.”
Automotive loan balances have grown nationwide, but showing the fastest pace are California, Texas and Nevada. States with the slowest growth rates are Hawaii, Wyoming and Michigan.
An increase in vehicle repossessions is one of the few dark spots in Experian’s third-quarter finance-market report, Zabritski says. Repos rose to 0.62% compared with 0.40% for the same time in 2012. But the increase was limited to finance companies that offer riskier loans. Otherwise, repossession rates are down for auto makers’ captive-financing subsidiaries, banks and credit unions.
Year to date, the repo rate is 1.5%, down from a recent peak of 2.7% in 2010.
The average monthly payment is $459 for a new car and $349 for a used vehicle, according to Experian. Average loan terms are 65 months for new cars and 60 for pre-owned vehicles.
“People are keeping their car payments the same by extending the length of the loan,” Miller says.
Borrego agrees: “Monthly payments are not changing, and longer auto loans are the key enabler.”
Seventy-two-month loans are 30% of the market, compared with 22% in 2009, she says. “But loans are not stretching much beyond 72 months. If they’re too long, people get into (negative) equity issues.”
Leasing is a way for consumers to avoid that, she says. Auto leasing now comprises 27.6% of vehicle deliveries.
If interest rates increased sharply it would cut into auto sales, Borrego says. “It would be a significant threat.”
For a typical car buyer, a 1-percentage point rise in the loan rate would increase the monthly payment 2.5%, she says. But don’t expect something like that to happen soon.
“We expect interest rates to stay the same short-term,” Borrego says. “We probably won’t see an increase until 2015.”
