Jason Laky, senior vice president and automotive business leader for TransUnion, explained that there are generally two reasons why consumers would want to take on a longer-term vehicle installment contract. One reason can be a positive for a finance company; the other motive perhaps not so much.
“One is that they plan to hold onto the car for a longer period of time so the term of the loan matches the useful life of the vehicle. And that’s a good thing,” Laky said.
“There’s another set of consumers that extended terms are the only way in which to get a payment they can afford. And that’s a little riskier for a lender,” he continued.
“We’re suggesting that lenders as a part of their check-up consider tools that help better understand how a consumer can afford a monthly payment,” Laky went on to say during a conversation with SubPrime Auto Finance News ahead of the newest study TransUnion released on Tuesday.
TransUnion’s latest research project found that even as the term of new auto loans has increased, the duration of time a consumer remained in these loans has declined.
The study indicated that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.
The study found that, despite the proliferation of longer loan terms, auto loan duration — the length of time a consumer keeps a loan and such loan remains in a finance company’s portfolio — has declined. For contracts originated in 2012, the average spread between term and duration has grown by nearly one month compared to loans originated in 2010. The study explored contracts in this period to provide sufficient time for the loans to mature to payoff.
Laky insisted this trend is important for finance companies because as borrowers remain in their auto loans about one month less, finance companies may not be capturing the benefits of more payments and greater interest income they might expect from longer-term loans.
“I think the industry is not surprised when longer-term loans have higher delinquency,” Laky said. “I think the question is — and each lender has to answer this one — is this a lot more than you would have expected?
“From a lender’s perspective, it’s ensuring that for those changes in credit risk that you’re getting compensated from an APR perspective,” he added.
TransUnion’s study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in Q3 2015 were between 73 and 84 month terms, compared to just 10 percent in Q3 2010.
TransUnion also mentioned that even as average new auto loan amounts increased between 2010 and 2015, the average monthly payment declined as consumers selected extended terms.
In Q3 2015, the average new auto loan amount was $21,368, compared to $18,008 in Q3 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in Q3 2010.
Even with smaller monthly payments, the study found that consumers with longer loans are more likely to be seriously delinquent (defined as ever 60 days or more past due) than borrowers with shorter terms, even when controlling for credit risk score.
Serious Delinquency Rates for Auto Loans by Term
| 49-60 months
| 61-72 months
| 73-84 months
“Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” Laky said in a TransUnion news release. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans.
“We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage,” he continued.
TransUnion’s study also revealed that the risk from longer-term loans lessened when consumers had sufficient cash flow for a new auto loan.
TransUnion used its CreditVision aggregate excess payment (“AEP”) algorithm, which incorporates monthly payments from mortgages, credit cards, student loans and other debt obligations, to determine a consumer’s capacity to afford a new auto loan payment.
The study determined that across all risk tiers, consumers with a positive AEP — meaning they have money available after their monthly minimum payments are made — performed better. Consumers across all risk tiers who had negative AEP values were more likely to be delinquent on their auto loans.
Delinquency Rates and AEP of Loans Originated between 73 and 84 Months
|Aggregate Excess Payment
“Aggregate excess payment is a powerful, predictive tool for determining whether a borrower is likely to repay a loan,” Laky said. “Lenders can use solutions such as CreditVision aggregate excess payment to understand the differences between consumers who choose a longer loan term and those who need a longer auto loan term.”
This study is the latest in recent projects TransUnion has rolled out since the initial launch of Prama Insights, which includes anonymized information on virtually every credit active consumer in the U.S. The data set leverages the power of CreditVision and a seven-year historical view of data, providing finance companies with what TransUnion calls “dynamic” insights that can translate into “clear” benefits at every touchpoint.
Earlier this summer, TransUnion leveraged its new tools to find that average daily auto originations are 84 percent higher in the 30 days after mortgage payoff compared to the 30 days prior to that event.
“We are emerging from our transformation from a corporate IT system and a mainframe to an open-systems environment,” Laky told SubPrime Auto Finance News. “That’s enabled us to create very broad and very deep analytic databases. Those are allowing us to do much more research in much closer to real time.
“Hopefully it will allow us to increase the pace at which we can do studies like this to support our auto finance community,” he went on to say.
To learn more about TransUnion’s auto study and solutions for finance companies, visit this website.