Brian Landau, senior vice president and automotive business leader at TransUnion, needed just one descriptive moniker to summarize the auto finance data from the fourth quarter — a correction.
The auto finance portion of TransUnion’s Q4 2017 Industry Insights Report released on Tuesday showed that while auto finance balances grew 5.5 percent between Q4 2016 and Q4 2017, this figure marked the lowest annual growth rate since a 5.3-percent rise in Q2 2012 over Q2 2011.
Despite a slowdown in balance growth, TransUnion observed a marked increase in the number of outstanding auto contracts — growing to 79.4 million in Q4 2017 compared to 75.8 million one year earlier.
“I believe it is a correction, just like whatever others in the industry might call it, because we’re starting to see not necessarily a sharp change happening with regard to originations or balances,” Landau told SubPrime Auto Finance News ahead of the report release. “It’s more of a slowdown in some parts of the credit spectrum. That to me means it’s a controlled tightening if you will.”
The TransUnion report showed originations also declined on a yearly basis for the fifth consecutive quarter, falling 4.8 percent in Q3 2017. The decline in originations was driven by an 8.2 percent yearly drop for the subprime, near prime and prime credit risk categories, though that was partially dampened by only a 0.2-percent annual decline in the prime plus and super prime risk categories.
TransUnion reiterated that originations are viewed one quarter in arrears to account for reporting lag.
Another important trend mentioned in the report included TransUnion determining that serious auto loan delinquency rates per borrower — contracts 60 days or more past due — also remained stable. The Q4 reading improved 1 basis point to 1.43 percent.
“It’s still a little too early to say whether or not we’re going to continue to see that trend. But it is a positive indicator that a correction is happening,” said Landau, while referencing that the latest rate is more than 20 basis points lower than the reading spotted during the worst of the Great Recession of 2008 and 2009.
So while some stock traders on Wall Street might cringe at the thought of a correction, Landau reiterated how in this case with respect to auto finance it’s an overall positive development.
“As we all know, finance companies have a number of different levers they can pull to match risk,” Landau said. “They can pull back on term. They can require a larger amount down at the point of purchase to reduce that (loan-to-value ratio). They can also adjust APR and the buy rate through the dealer to offset the credit risk that’s constantly changing. They’re always calibrating and recalibrating accordingly.
“The market is pretty resilient as I’ve said before,” he went on to say. “We have a number of people in the industry who have gone through a number of cycles to know what to anticipate. They’re being very proactive to any of the underlying trends they’re seeing. That’s why you’re seeing a slight tightening of underwriting policies and pricing.”
|Auto Finance Metric||Q4 2017||Q4 2016||Q4 2015||Q4 2014|
|Number of Auto Loans||79.4 million||75.8 million||71.1 million||65.2 million|
|Borrower-Level Delinquency Rate (60+ DPD)||1.43%||1.44%||1.27%||1.19%|
|Average Debt Per Borrower||$18,597||$18,391||$18,004||$17,456|
|Prior Quarter Originations*||7.1 million||7.5 million||7.5 million||7.0 million|
|Average Balance of New Auto Loans*||$20,909||$20,743||$20,245||$19,710|
*Note: Originations are viewed one quarter in arrears to account for reporting lag. Source: TransUnion
Overall credit trends
TransUnion highlighted that the consumer credit market concluded 2017 on a high note with strong performance across multiple credit products, according to TransUnion’s Q4 2017 Industry Insights Report powered by Prama analytics.
Analysts found that most indicators point to a healthy credit market, though there are a few signals that lenders are being more active in rebalancing portfolio risk.
“Consumers continue to gain access to more credit, and balances are generally rising at a healthy clip,” TransUnion vice president of research and consulting Matt Komos said in a news release.
“For the most part, consumers are paying their debts in a timely fashion, which has been especially evident for mortgages and personal loans,” Komos continued. “This is likely a result of the strong economy, which has helped consumers manage their personal balance sheets and build confidence.”
During 2017, TransUnion observed 20.3 million more accounts spanning auto, credit card, mortgage and unsecured personal loans. Analysts contend the growth is likely due to continued declines in the unemployment rate, which decreased to 4.1 percent in Q4 2017 compared to 4.7 percent in Q4 2016.
Additionally, the University of Michigan’s Index of Consumer Sentiment — a measure of consumer confidence — stood at 95.9 in December 2017, up 2 percent from December 2016.
“This demonstrates consumers have positive expectations regarding the overall economy, and we anticipate this will lead to higher consumer credit activity in the near future,” Komos said.
“While most indicators point to a fluid consumer credit economy, we are monitoring the market closely for any potential shifts,” Komos continued. “Material upticks in delinquency, interest rate increases beyond what is expected, or other unanticipated economic shocks could certainly impact the market adversely.”
TransUnion’s special website here contains more charts and details about the Q4 2017 Industry Insights Report.