TransUnion maintains focus on auto-finance fundamentals & potential tailwinds

Perhaps finance company executives might become a bit concerned when seeing the combination of slowing originations coupled with broad economic turbulence stemming from global trade clashes as well as more troubling signs emanating from markets beyond the United States.

Well, a pair of analysts from TransUnion looked at their latest data and reiterated the fundamentals about why the auto-finance market can and should remain healthy.

According to the auto-finance segment of the Q2 2019 Industry Insights Report from TransUnion, the total number of auto loans rose by 1.8 million in the last year, though year-over-year auto origination growth turned negative for the first time in five quarters.

Despite overall declines in originations, analysts found that growth occurred predominately in a straddle pattern and was focused in the super prime (+1.0%) and subprime risk tiers (+2.1%).

TransUnion determined serious delinquency rates (more than 60 days past due) stood at 1.23% in Q2, just 1 basis point higher than what was observed in Q2 of 2018 and the same level as Q2 2017.

As Gen Z grows older, analysts also discovered 1.3 million consumers with an auto balance were added to this category in Q2; a higher volume of new participants than millennials and Gen X combined.

“Auto affordability continues to pose a challenge for consumers with factors such as increased new vehicle pricing and plateauing terms contributing toward more expensive monthly payments,” said Satyan Merchant, senior vice president and automotive business leader at TransUnion.  “The weakening demand has resulted in a slowdown of origination growth and an overall softening in the market.

“Industry forecasts indicate new vehicle sales will fall below 17 million this year for the first time since 2014,” Merchant continued in a news release. “Despite this trend, performance remains strong with delinquencies keeping steady year-over-year.”

Before embarking on a new position within the credit bureau, TransUnion’s Brian Landau also shared his assessment of the company’s latest data, reiterating how the growth of Gen Z consumers taking on auto financing is an important tailwind.

Others tailwinds to help auto financing mentioned by Landau included favorable interest rates thanks to the recent actions by the Federal Reserve as well as a healthy supply of used vehicles. That used-vehicle inventory also prompted Landau to explain why that factor is likely to be important for the auto-finance industry maintaining a positive course in light of the investment world traveling a bit of a roller-coaster stemming from the trade clash involving the U.S. and China.

“Say the tension between the U.S. and China increase and tariffs continue to be added on goods,” Landau gave as a hypothetical to SubPrime Auto Finance News. “What you'll see is an even greater shift toward used vehicles because used vehicles in the market today are not going to be subject to those tariffs. Where it’s going to impact consumers is around the cost of ownership, parts and labor, when they have to service vehicles over the next couple of years.

“Eventually, consumers are going to want to buy a new car. Cars will continue to age, and if the tariffs are to continue, it might force them to downsize a cheaper, less expensive vehicle,” he continued.

“But we all know transportation is fundamental, and it’s a lifeblood of the economy,” Landau went on to say. “You need to get around to work, pick up your kids, do your chores. People need a car. They might just delay a purchase if tariffs become a real issue, just like gas prices have been. If gas prices were to rise about $5 a gallon, people might consider a sedan versus an SUV. But I don’t think we’ve hit that trigger point.”

Q2 2019 Auto Loan Trends

*Note: Originations are viewed one quarter in arrears to account for reporting lag. Source: TransUnion