Make it 13 quarters in a row during which the average amount consumers had remaining on their vehicle installment contract moved higher year-over-year.
TransUnion's Industry Insights Report indicated that auto loan debt per borrower jumped 4.1 percent from $16,410 in the second quarter of last year to $17,090 in Q2 of this year.
On a quarterly basis, TransUnion reported auto loan debt increased 1.35 percent from $16,862 in the first quarter. TransUnion automotive vice president Peter Turek pointed out that auto loan balances rose in every state year-over-year during the second quarter.
Among the biggest U.S. cities, Houston and Phoenix saw the largest yearly auto loan debt rises of approximately 6 percent. Houston's average auto loan debt increased to $21,690, the highest such number of all major markets.
“The numbers reflect a continued healthy marketplace,” Turek told SubPrime Auto Finance News this week. “There’s competition amongst the manufacturers, auto lenders and dealers. It’s great, healthy competition. I think in the end it benefits all of those stakeholders, especially consumers, the folks who drive those vehicles every day and make the payments.
“What we’re observing is the fact that there is more recent originations,” he continued. “As consumers over the past several quarters have demonstrated, auto sales have been booming and related financing has been booming so we have a lot more auto loans on the books that are recent that have higher balances. That’s what’s driving the higher average balance across all age groups and the industry.
“In addition, when you think about what was going on a couple of years ago, consumers were deleveraging so we were talking about how average balances were going down quarter-over-quarter,” Turek went on to say. “Now we’re in the 13th consecutive quarter where there has been an increase in auto loan debt. I would say that’s primarily from increasing auto sales and more, and more consumers buying automobiles and financing them.”
In a new view of the data, TransUnion also noticed that auto loan debt increases for different age groups remained in a tight range, though changes observed for borrowers ages 40 to 49 were noteworthy. These borrowers saw the largest yearly percentage increase — up more than 5 percent — while also having an average auto loan debt level nearly $1,000 higher than the next age group.
“We’re pleased to offer this slice of data. We think it gives some value around what consumers in different age groups are doing. It’s not really surprising. I think some of it is intuitive. When you think about the ages of people when they’re the most credit active is typically between ages 40 and 60,” Turek said.
TransUnion recorded 62.3 million auto loan accounts as of the second quarter, up from 58.2 million a year earlier. Viewed one quarter in arrears (to ensure all accounts are included in the data), new account originations increased to 6.20 million in the first quarter of this year, up from 5.82 million in the same period last year.
Not Alarmed by Q2 Delinquency Uptick
Auto delinquencies rose slightly in the second quarter because there’s more paper on the streets nowadays, but TransUnion analysts don’t think the trends are necessarily bad for the industry.
According to TransUnion, the auto loan delinquency rate — the ratio of borrowers 60 days or more delinquent on their vehicle installment contracts — increased to 0.95 percent in Q2, up from 0.87 percent a year earlier.
However, TransUnion pointed out that auto delinquencies dropped on a quarterly basis from 1 percent in the first quarter of this year.
Turek explained that the latest delinquency rate remains below the Q2 average of 1.05 percent observed between 2007 and 2014.
Since 2007, Turek noted, the auto loan delinquency rate has reached as high as 1.59 percent (in Q4 2008), while its low was observed in Q2 2012 at 0.86 percent.
"Auto lending remains similar to what we have observed during the last several quarters,” Turek said. “Delinquency rates remain relatively low while auto loan balances keep rising — both metrics aided by increasing auto loan originations.
"In fact, there are 4 million more auto loan accounts in the marketplace than we observed just last year. This means with more auto loans in the marketplace and a delinquency rate ticking higher, we now have several thousand more delinquent accounts than at the midpoint of 2013,” Turek went on to say.
TransUnion indicated that all but six states experienced an increase in their auto loan delinquency rates between Q2 of last year and Q2 of this year. The largest delinquency increases occurred in Alaska, Michigan, Montana and Nebraska.
The largest declines occurred in Hawaii, South Dakota and Oregon.
The subprime delinquency rate (those consumers with a VantageScore 2.0 credit score lower than 641 on a scale of 501-990) increased from 4.12 percent in the second quarter of last year to 4.61 percent in Q2 of this year.
Turek also noted the share of non-prime, higher risk loan originations (with a VantageScore 2.0 credit score lower than 700) grew by 56 basis points (from 33.80 percent in Q1 2013 to 34.36 percent in Q1 2014). This percentage is still lower than what was observed seven years ago near the beginning of the recession (38.98 percent in Q1 2007).
Turek said observers should not read too much into the numbers because “4.61 percent of 1,000 is different than 4.61 percent of 1 million. I’m not suggesting it’s not a reason for concern. But I think when you think about the number of loans that are entering into 30-day delinquency, they’re not flowing through. Even though we still have a low delinquency rate overall, the number of new originations has certainly increased the frequency of delinquency. But we’re not seeing them translate into significant losses.
“As you look at that across the industry, you would interpret that as it’s pretty healthy. People are continuing to buy cars. They’re continuing to finance cars. It seems to be working right now, just in a very healthy way,” he continued.
"It will be interesting to see if lending to the subprime segment of the population continues to grow and what, if any, the impact will be on the overall delinquency rate,” Turek went on to say. “Historically, increased subprime lending pushes the overall delinquency rate higher. This is not necessarily a bad thing for the auto ecosystem — consumers find reliable transportation for work, lenders actively minimize the risk, and dealers sell more cars.”
Auto Finance: A Self-Managing Industry
SubPrime Auto Finance News also gathered Turek’s perspective on what’s been the talk of the summer — a perceived bubble inflating in connection with subprime vehicle financing. Like many other observers, Turek shook off thoughts that subprime auto finance is traveling down the same tracks as mortgages that derailed the economy into the Great Recession.
“When you think about what auto lenders do, they manage risk,” Turek said. “Where we are in the current business cycle we are seeing some tremendous growth since 2010 and 2011. Some of the growth is slowing so auto sales are slowing year-over-year. There’s going to be lenders that adjust where they buy to get more volume. There’s going to be more subprime lenders in the marketplace. And then there’s going to be consumers who feel more comfortable taking on a loan.
“When all of those factors combined come together in terms of the ecosystem, there’s going to be increases in delinquency. What we’re seeing is a return to this healthy competition. Delinquency is still, compared to other periods of time, really low, even in the subprime space,” he continued.
Turek also pointed to how finance companies cater their underwriting and analysis quite different between any auto or mortgage business it might conduct.
“Most of the time a vehicle is a shorter term piece of collateral. It’s not an appreciating asset. It’s a depreciating asset,” Turek said. “There’s a lot of that analysis that goes into the financing of that vehicle. It’s an interesting topic, but when you look at the numbers and peel them back, the industry has a way of self-managing itself when it comes to cost and things that impact the industry.
“When you look back at gas prices spiked, there were some lenders that had a lot of SUVs in their portfolio. They were able to account for those potential loan losses if one of those vehicles went bad because of gas prices or their values went sharply down,” he continued.
“Values and depreciation are priced into the loan,” Turek added. “I really don’t see that there is a subprime bubble. When you look at our data and delinquency, I think we’re returning to pretty healthy numbers.”