The growth in the subprime auto finance market has been as steep as it has been talked about — and it’s also something that Edmunds.com chief economist Lacey Plache says to keep an eye on.
However, she emphasized that we’re not yet at a tipping point, and this could be a plus for car sales.
In an Edmunds report authored by Plache, she said that “while the growth of subprime lending should be watched for signs of dangerous over-extension, we are not yet at the point where a substantial pullback by lenders is likely.”
Plache adds in the report: “That's good news for car sales, which should also continue to be strong.”
The analysis — titled “What Car Shoppers Want Now” — and an accompanying news release provide a temperature check on today’s auto sales environment, including thoughts from Edmunds on why car buyers are getting their hands on pricier vehicles more easily these days,
According to Edmunds, the record-pace leasing numbers are playing a big role, along with cheaper credit and a handful of positive overall economic factors.
Edmunds counts economic trends like lower employment, consumer confidence in the economy and lower fuel prices among the drivers steering shoppers back to pricier rides, particularly trucks and SUVs.
And don’t expect this comeback to be short-lived.
“The cost-conscious, fuel-efficient mentality from the recession and early recovery years has faded,” said Plache.
“We expect these economic trends to continue into next year at least, so there’s every reason to believe that shopper preferences for larger and more expensive vehicles will continue along the same path that we’ve seen emerge in the past year or so,” she added.
And then there’s the whole financing ballgame.
Cheaper credit and the lease boom are among “the biggest factors that are making it easier for shoppers to afford more expensive vehicles,” Edmunds indicated.
In May, 9.5 percent of new-car buyers who used financing did so through a 0-percent loan, according to Edmunds. This reading marked an eight-month high.
Leasing, meanwhile, continues to skyrocket. Year-to-date new-vehicle lease penetration is above 28 percent, according to Edmunds, and is on track to an all-time annual high.
In May, the average monthly payment on leased vehicles was $70 lower than the average on financed vehicles.
One twist to these findings that Edmunds discovered: while trucks and SUVs are getting a shot in the arm, the same can’t be said for the luxury market. The majority of luxury segments have had relatively flat consumer appetite numbers the past two years.
“Today’s car shoppers are taking a step or two beyond the more financially conservative choices made in recent years, but we aren’t generally seeing the mainstream buyers reach into luxury the way we did before the economic crisis,” Plache said. “That was a time when many aspirational shoppers stretched their finances to get a high-status nameplate, now they are instead buying mainstream vehicles with tech options and creature comforts that allow them to spoil themselves just a little.”
However, Edmunds does note that luxury buyers have shifted toward the higher price points of the luxury spectrum, like mainstream buyers have done on the mainstream side.
Credit Acceptance Corp. announced that week that the company increased the amount of its revolving secured line of credit facility with a commercial bank syndicate.
The company raised the line from $235.0 million to $310.0 million while also extending the maturity of the facility from June 23, 2017 to June 22, 2018.
“There were no other material changes to the terms of the facility,” officials said.
Credit Acceptance also announced this week that it increased the amount of one of its revolving secured warehouse facilities from $75.0 million to $100.0 million.
“There were no other material changes to the terms of the facility,” officials repeated.
As of June 11, Credit Acceptance indicated it had $42.0 million outstanding under its revolving secured line of credit facility and $20.2 million on its revolving secured warehouse facility.
This week, RouteOne announced that Southeast Toyota Finance, the provider of financing to 176 Toyota dealers in the Southeast, elected to activate RouteOne’s automotive finance platform.
RouteOne’s credit application system is designed to be complimentary to dealers and can provide a wide range of options, such as payoff quotes, compliance and reporting tools.
As a result of RouteOne and Southeast Toyota Finance’s integration, RouteOne chief executive officer Mike Jurecki insisted Toyota dealers will receive a winning combination of great service, technology and finance programs.
“We are excited to welcome Southeast Toyota Finance to our platform,” Jurecki said. “This integration brings our Toyota dealers access to a leading finance source that shares a similar commitment to customer service and strong dealer relationships.”
Southeast Toyota Finance vice president Brick Toifel stated, “We are committed to providing the best possible service to our dealers.
“This provides our dealers with multiple service provider options they can utilize to submit credit applications to our dealer service department, streamlining the process for them and providing Toyota customers with the best experience possible,” Toifel went on to say.
Evidently, dealerships and finance companies aren’t just giving cars away to just any consumer who arrives on the lot and completes a vehicle installment contract application, inflating that “bubble” some observers continue to mention.
On Monday, Experian Automotive reported that the percentage of automotive loans that fell within the subprime and deep subprime risk categories made up 19.7 percent of the market in the first quarter, representing its lowest share since 2012.
According to the State of the Automotive Finance Market report for Q1 2015, subprime loans made up 16.2 percent of the market, while deep subprime loans captured 3.5 percent.
Experian defines subprime as individuals with VantageScore 3.0 credit scores between 501 and 600 and deep subprime consumers as coming in between 300 and 500.
“Over the last year, there has been a tremendous amount of conversation around the growth in subprime loans, and the concern over the automotive finance industry approaching a potential ‘bubble,’” said Melinda Zabritski, senior director of automotive finance for Experian.
“While it’s true that the volume of subprime loans is up, the same can be said for the rest of the risk categories. It’s important to keep in mind that, while we should continue to watch them, the percentage of subprime loans make up a small portion of the market,” Zabritski continued.
Findings from the report also showed that finance companies continued to grow their overall portfolios, as total outstanding balances for automotive loans reached a record-high $905 billion in the first quarter 2015, up 11.3 percent from a year ago.
Additionally, despite an increase in the numbers of loans put into play, analysts found that both 30- and 60-day delinquencies saw slight decreases in the first-quarter report. Experian said 30-day delinquencies were down 4.1 percent from a year ago, while 60-day delinquencies dropped 3.2 percent over the same time period.
“The current stability in the automotive loan market is a testament to consumers making timely payments on outstanding loans, which is evident in the improvement in delinquency rates,” Zabritski said.
“While the market is in a positive position right now, dealers and lenders will want to want to keep an eye on these data sets and use them for the good of their business, as the insights enable them to make better decisions in terms of loan terms and interest rates,” she went on to say.
At a state level, Experian noticed the highest delinquency rates occured primarily in the South, while the states with the lowest rates were typically found in the Midwest and Northwest.
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30-day delinquencies
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60-day delinquencies
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Highest delinquencies
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Lowest delinquencies
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Highest delinquencies
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Lowest delinquencies
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Mississippi
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3.1%
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North Dakota
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0.9%
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Washington, D.C.
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1.0%
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South Dakota
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0.2%
|
|
Washington, D.C.
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2.9%
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Oregon
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1.0 %
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Mississippi
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0.9%
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Oregon
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0.2%
|
|
Louisiana
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2.7%
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South Dakota
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1.0%
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Louisiana
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0.8%
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Minnesota
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0.3%
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South Carolina
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2.6%
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Washington
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1.1%
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New Mexico
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0.7%
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Arkansas
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0.3%
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|
Alabama
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2.6%
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Minnesota
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1.1%
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Alabama
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0.7%
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Iowa
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0.3%
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Western Funding, a specialized auto finance company focusing on subprime credit, explained the benefits its Triple Pay reward program for dealerships while also reporting sustainable growth stemming from its first-quarter performance.
With the launch of Triple Pay, the company highlighted that dealers have the opportunity to build a portfolio of accounts that can allow them to share in the profits of each deal made.
The launch of this program can allow dealers to build a bankable portfolio and receive three different types of payments on the same deal — upfront checks, near portfolio closing, and back-end payment streams. In order for the dealer to get their first check, the dealership must produce 50 deals.
“With the release of our newest program, Triple Pay, we look forward to helping dealerships maximize their profits by giving them up to 50 percent of the interest collected and the entire principal as the customer makes payments,” Western Funding vice president Bret Pangborn said.
“Our focus is developing our current dealer base as well as inviting new dealerships to join our team,” Pangborn continued. “To best serve our growing dealer base, we have officially launched our national recruiting campaign for qualified sales representatives.”
With Triple Play now in place, Western Funding’s first quarter resulted in an increase to $68.9 million in principal loan balances from $28.7 million in the prior year, a 142 percent year-over-year growth rate.
Western Funding originated more than 2,200 loans in Q1, with the majority of loans being sourced on DealerCenter.
The company added that its static losses have continued to improve as a percentage of the amount advanced.
“We are excited with the opportunities in the automotive finance market,” Western Funding president Guerin Senter said. “We continue our strategic growth with a heavy focus on increasing dealer portfolios.
“We anticipate consistent performance through the end of the year and to end at a $150 million portfolio,” Senter went on to say.
Dealerships interested in learning more about Western Funding’s Triple Pay program can call (888) 434-3150.
Charlie Wise acknowledged banks, credit unions and finance companies kept coming to him and his TransUnion colleagues asking about the risks associated with consumers — particularly millennials — holding student loan debt.
The volume of inquiries prompted TransUnion to examine the issue, and the project findings are “good news” for the auto finance market, according to Wise.
Despite an unprecedented rise in student-loan balances over the past decade, a new TransUnion study found that student loan obligations have not inhibited younger consumers’ ability to access and repay other consumer credit categories such as auto loans and mortgages when compared to their peers without student loans. Wise noted the conclusions are contrary to the popular belief that burgeoning student debt is hampering access to credit for young adults.
“This is good news, particularly for auto lenders,” Wise told SubPrime Auto Finance News in advance of the study release on Wednesday.
“Not only should they be not necessarily scared of millennials with student loans, but this is actually a credit hungry group. This people are more credit active than those without student loans. All things being equal, they actually perform better because there have lower delinquency rates,” continued Wise, co-author of the study and vice president in TransUnion’s Innovative Solutions Group.
“For those looking to grow and looking to particularly grow with a millennial population and a population, this is really good news. It allows you to identify and potentially go after that student loan cohort rather than worry or be concerned about lending to them,” Wise went on to say.
TransUnion determined consumers ages 18 to 29 with a student loan in repayment generally are able to gain access to new loans and perform as well or better on those new loans as similarly aged consumers without student loans. Furthermore, the study found that in only three to six years, student-loan consumers in their 20s have been observed to pass similarly aged consumers without a student loan in overall loan participation rates on mortgages, auto loans and credit cards.
The results from the study were revealed at TransUnion’s Financial Services Summit in Chicago, which included more than 275 senior-level financial services executives from across the globe.
“Going to school impacts young consumers' access to credit; while in school, students may be less likely to have a job and generate the income necessary for loan approval. However, most catch up once they leave school — and their ability to catch up has not changed over the past decade,” said Steve Chaouki, executive vice president and the head of TransUnion’s financial services business unit.
“Our study demonstrates that consumers in their 20s with student loans in repayment — that is, once they finish school — are in fact able to access credit at levels similar to or better than their peers who do not have student loans,” Chaouki added.
The study found that in the years after they start repaying student loans, those consumers have similar new mortgage activity to, and higher new auto and credit card open rates than, their peers without student debt.
Rapid Rise in Student Loans
Wise admitted the study’s findings may come as a surprise because of the rapid rise in student loan balances.
According to TransUnion data, the percentage of consumers ages 20 to 29 with a student loan has skyrocketed from 32 percent in 2005 to 52 percentat the end of 2014. In the last five years alone, student loan balances have increased from $589 billion in Q1 2010 to $1.1 trillion in Q1 2015.
The share of student loans in relation to other products such as mortgages, credit cards and auto loans as part of a the overall loan “wallet” for consumers ages 20-29 has also grown dramatically — increasing from 12.9 percent in 2005 to 36.8 percent in 2014, an increase of 186 percent.
“We wanted to do a study to answer that question because everyone seemed to have that opinion that student loans really are a burden on younger consumers,” Wise said. “If the answer is they’re right, it would be good to confirm that. If it’s not right, it would be good to cut through those misconceptions.”
Student Loan Study Background
TransUnion observed, on a depersonalized basis, borrowers with student loans who entered repayment from three different timeframes: Q4 2005, Q4 2009 and Q4 2012. Student loans generally enter repayment status six months after students graduate or otherwise end their studies.
In other words, students graduating in May or June usually begin to make payments on their student loans in the fourth quarter of the year in which they graduate.
The study looked at the performance of consumers ages 18 to 29 on mortgages, credit cards and auto loans in the 24 months following the beginning of their student loan repayment. These consumers were compared to control groups of similarly aged persons who had no student loans during those same time periods. The study also controlled for differences in credit-score distributions between the student loan and control groups, as well as age distribution.
“We looked at three distinct timeframes to get a better sense of the student loan picture,” Wise said. “We believe most people would agree that 2005 was a ‘normal’ year, in that the economy was strong and credit was readily available to younger borrowers.
“In other words, it is fair to use 2005 as a baseline for comparison. Q4 2009 was in the immediate aftermath of the financial crisis, while Q4 2012 represented the most recent data available for observing trends over an ensuing two years,” he continued.
Delinquencies Lower, Participation Higher
The results from the study showed that the changing economy and shifts in the ability to access consumer credit greatly impacted younger consumers overall, both those with a student loan and those without. The percentage of consumers ages 18 to 29 with credit products such as mortgages, credit card and auto loans dropped significantly between 2005 and 2012.
However, this drop impacted both consumers with student loans and those without similarly; the presence of a student loan in repayment did not appear to disproportionately impact consumers with student loans. Other macroeconomic factors, such as rising unemployment rates for younger consumers and tightening lending standards, were likely far larger contributors to decreased consumer credit originations and participation by all consumers in this age group.
“Participation rates for mortgages, credit cards and auto loans dropped significantly between the 2005-2007 and 2012-2014 timeframes — and impacted both consumers repaying student loans and those in the control group to a similar degree,” Wise said.
“However, just as we observed in 2005, student loan borrowers in 2012 generally left school with lower loan participation rates than their control counterparts, likely due to difficulty in accessing credit while a student with little or no income,” he continued.
“Over the next two years, student loan borrowers were actually more credit active in opening new auto and credit cards, enabling them to close this gap. Further, we saw the rate of new mortgage originations nearly identical between the student loan and control groups, keeping the mortgage gap constant — the same thing we saw in the 2005 cohort,” Wise went on to say.
“Even the immense growth in student loan balances does not appear to be driving any different impact on new credit access today than what we saw a decade ago,” he added.
In addition, results from the study show that consumers ages 18 to 29 with a student loan in repayment generally had better performance on new accounts than their peers without student loans.
For instance, those consumers with a student loan entering repayment at the end of 2012 had a 15 percent lower 60-day delinquency rate on newly opened auto loans by the end of 2014 than those consumers without a student loan in the same cohort.
Over that same timeframe, student loan borrowers also had a 1 percent lower 60-day delinquency rate on new credit cards than the control group.
“This is an important finding, because it shows lenders that rather than being concerned about student loan borrowers’ ability to manage new credit, this may actually be an attractive marketable group, both in terms of higher credit demand as well as potentially better repayment performance,” Wise said.
“Lenders looking to attract and maintain relationships with millennials should find this news encouraging,” he added.
Convergence Point
The study also looked over longer timeframes to find if and when consumers with student loans in repayment caught up with the control group in terms of new loan participation and originations.
“Student borrowers often leave school with fewer consumer loan products than their peers who do not have student debt. But once they graduate, they immediately begin to catch up to their peers,” Wise said.
For the 2005 group, TransUnion found that this convergence in loan participation occurred after two years for auto loans, after which point the student loan group had a higher percentage of auto loans. The convergence timeline took six years for mortgages.
Even with elevated student-loan debt levels and coming off a devastating recession, convergence timeframes did not increase dramatically for the 2009 cohort.
For auto loans, the convergence timeframe increased to three years, primarily due to the fact that student loan borrowers left school in 2009 with a larger gap compared to the control group than they did in 2005, but they were able to close this gap through higher new auto loan originations.
For mortgages, the 2009 student loan group was 1 percent behind the control group after five years and on track to reach convergence after six years—the same convergence timeframe as observed in 2005.
“Despite having thousands of dollars more in average student-loan debt in more recent years, our study clearly shows that student-loan borrowers in repayment continue to catch up to the control group — those without a student loan — in a relatively short period, due to their higher new loan origination rates,” Wise said.
“This is an especially important finding, because it shows the dramatic rise in student loan balances has not materially impacted younger consumers in gaining access to mortgages, auto loans or credit cards, or in their ability to successfully manage their new credit obligations,” he went on to say.
For more detailed information about the TransUnion Student Loan study, visit http://transunioninsights.com/studentloans.
There has been a spate of articles lately discussing concerns about elevated growth in the auto finance sector. Some have argued that increased subprime lending to low- and middle-income consumers could result in some of the same fallout that occurred in the wake of the subprime mortgage crisis. Others have bemoaned the asset-backed securities sector in general, as well as the fact that many auto loans are packaged into exotic deals and sold off to investors hungry for yield.
Most of these concerns seem unfounded. The subprime auto industry has been around for many years and historically, although anecdotes about poor underwriting can always be found, the rate of industry losses has been manageable. This situation would likely continue even if recent macroeconomic good fortune were to evaporate. Although the concept of a subprime mortgage was a radical idea in 2004, the notion of “no credit, no worries” in the auto sector has never been particularly controversial.
There are three main reasons for optimism regarding auto finance. First, the auto markets are inherently non-speculative. If you know of anyone stockpiling Toyota Camrys with a view to a quick flip then you have my blessing to panic about the state of auto finance. Second, if the economy goes south, favorable used-vehicle supply-side dynamics will eventually kick in to offset elevated default rates. Third, Americans love (and significantly rely on) their cars and will typically sacrifice much to maintain access to individualized transportation.
One recent trend in auto lending that does raise concerns, however, is the growth in longer-term loans. In the past, consumers would typically take a 60-month loan as the standard option to buy a new car, with some cash-strapped buyers possibly being offered a 72-month loan to get the deal done. Nowadays, many are signing up for 84- or even 96-month commitments, especially at the subprime end of the spectrum.
Some will say that since cars are now built better and last longer, the move toward longer-term loans is a reasonable development. Bear in mind that when the loan is finally exhausted ― be it after five, eight or 20 years ― the car owner will hold some equity, even if it is merely the salvage value of the vehicle. The question, though, is not whether a vehicle is still drivable after eight years. The more pressing issue is the relationship between the principal outstanding on the loan and the dynamics of the car’s market value at interim periods. How will borrowers behave if, after five years, their ride is under water, with three years of loan payments still to go? Will they keep licking the stamp?
To understand this question, it helps to quantify the equity remaining in the vehicle under some typical assumptions about loan terms. To assist in this endeavor, we can use Moody’s Analytics AutoCycle solution that forecasts of car wholesale values under stress economic scenarios at the make/model/year level.
Sample Scenario
Consider two different vehicles: One is the Toyota Camry, which is the fifth highest-selling vehicle in the U.S. and well-regarded in terms of its resale value. The other vehicle is the Jeep Wrangler, which is famous for its retention of value in the secondary used-vehicle market. We assume that they are both 2014 vehicles purchased in early 2014 and consider loans with two interest rates: one with a 12 percent APR and one for which a relatively good-quality borrower can negotiate a 6 percent annual rate. We also assume that the loan amount is approximately equal to the full economic value of the vehicle on the day of purchase. In other words, we assume that the down payment covers on-road costs, including any depreciation caused by merely driving the vehicle off the lot.
The projections indicate substantial seasonality. The source of this is the seasonal pattern in the outcomes of wholesale vehicle auctions, which form the basis of the projections developed here. Looking through these cycles and focusing on the trend, we see that under baseline macroeconomic conditions, the 60-month loan generates substantial amounts of equity in the vehicle across the entire forecast horizon. Camry owners with such loans can expect to end their term owning a $12,000 car outright, while the Wranglers will be worth slightly more at that point (the vehicles, as specified, have similar values on day one).
By way of contrast, when we assume an eight-year loan term, we see that the equity held in the vehicle never amounts to much. Under baseline conditions, we find that the Camry owner has just shy of $4,000 in the vehicle after a little more than two years, but this figure will decline as the vehicle ages and end the five-year forecast horizon a little higher than a grand to the good. The situation is a bit better for Wrangler owners: Equity in the vehicle will grow over time, albeit at a glacial pace, ending the five-year window at around $4,000.
In a dire macroeconomic scenario (the Moody’s Analytics S4 scenario), the situation for 96-month loans becomes even more tenuous. Wrangler owners’ equity does not start to turn positive until three years into their loan term, while Camry owners effectively never build a significant ownership stake in their vehicles. Specifically: For the Camry, the 96-month loan is almost $3,000 under water after three years, but for the Wrangler, it is closer to $1,000. In S4, the 96-month Camry loan remains under water through the entire forecast period. (Based on these numbers, Camry speculation looks like a fool’s errand.) By contrast, the 60-month loan terms yield positive equity at all points in time even in the event of a recession; the dynamics for a 12 percent APR loan are similar.
Possible Conclusions
We can draw several additional conclusions from this analysis. The first is that, in most respects, 96-month auto loans are effectively operating as unsecured loans. From the bank’s perspective, after costs are carefully considered, it is a toss-up whether the wholesale value of the vehicle will cover the outstanding balance of the loan, assuming a 96-month term and a “full economic value” starting point. This suggests that interest rates on 96-month loans really should be only marginally lower than on the equivalent unsecured personal installment loans made to borrowers with similar credit scores. The car might still be worth something after repossession, but only if a number of external factors go right for the bank.
One implication of this analysis is that if a 96-month loan is already effectively an unsecured loan, a bank might as well issue 108-month loans ― such a trend would make little difference to the likely dynamics of available vehicle equity. Then again, giving subprime clients 108 potential payments to miss would almost certainly be a losing proposition!
All joking aside, the final point is that down payments are obviously critical. With outstanding equity almost flat under the assumptions employed here, it makes sense for financiers to build a buffer into the terms of the loan in the form of a higher down payment. Lenders who grant these loans should nonetheless be aware that the borrower’s initial equity is unlikely to grow during the life of the loan. Further, the desirability of a large down payment likely negates the need for a 96-month loan in the first place.
“Sure, we can get you into a 96-month loan, but you have to pay $4,000 up front” is a lot less catchy than “no credit, no problem!”
Tony Hughes is the managing director of credit analytics at Moody’s Analytics. Hughes oversees the Moody’s Analytics credit analysis consulting projects for global lending institutions. An expert applied econometrician, he has helped develop approaches to stress testing and loss forecasting in retail, C&I, and CRE portfolios and recently introduced a methodology for stress testing a bank’s deposit book. For more information visit www.economy.com/autocycle
GO Financial and NextGear Capital recently launched their "Gear Up and GO" rebate program.
Officials said this new promotion, which began on April 1, provides dealers the opportunity to earn a $100 credit for each eligible vehicle that is floor planned with NextGear Capital and sold to a consumer via GO financing.
“It’s important to us that our customers enjoy success in all aspects of their business, which is why we are excited to partner with GO Financial on this new rebate program,” NextGear Capital president Brian Geitner said. "This is just another example of the great benefits available to dealers through the Cox Automotive network."
Colin Bachinsky, president of GO Financial, added, “This is a great opportunity to work with NextGear Capital to provide even more value and financing opportunities to our participating dealers. We hope this is the first of many innovative programs we will bring to market with NextGear Capital and our other Cox Automotive partners."
Both Geitner and Bachinsky emphasized that this promotion is the latest example of how the ongoing partnership between NextGear Capital and GO Financial allows them to provide superior value to dealers nationwide.
In 2014, GO rolled out its unique financing program to all NextGear Capital markets, providing dealers with more access to the expanding subprime market.
In an effort to help dealers monitor their floor-planning resources more efficiently, NextGear Capital recently announced that it added Kelley Blue Book values to its myNextGear Web and mobile applications.
As a result of this integration between the two Cox Automotive business units, NextGear Capital customers can now receive current market-reflective values at no additional cost for new and used vehicles
“By continually adapting the way we put information in front of our customers, we can offer them greater flexibility in how they do business," said Bryan Everly, chief technology officer with NextGear Capital.
“We are constantly challenging ourselves to make our product better, and that includes providing cross-platform functionality with other Cox Automotive solutions,” Everly continued.
The addition of Kelley Blue Book Values comes less than a year after NextGear Capital added MMR values to myNextGear. Through these evaluation tools, dealers now have access to entry-level data to help them make informed purchasing and selling decisions from either the comfort of their office or on the go.
“Trusted by consumers and the industry, it was a natural choice to provide Kelley Blue Book Values to NextGear Capital customers,” said Dan Ingle, vice president of vehicle values and industry solutions for Kelley Blue Book.
“Kelley Blue Book's information will not only help mitigate risk, but this aligns with the overall company strategy to provide relevant market-reflective values at the point they are needed in the transaction process,” Ingle went on to say.
General Motors Financial is less than two quarters into its strategic adjustment of originating more prime paper than the finance company ever has in part to its enhanced relationship as the captive for the parent automaker.
But GM Financial is already seeing how more prime customers in its portfolio is leaving an impact on its delinquencies and its allowances for loan losses. That’s what company executives shared when they reported their first-quarter performance, which included gains in net income and consumer loan originations.
Taking into account what GM Financial reiterated is seasonality, the company said its consumer finance receivables 31-to-60 days delinquent stood at 3.4 percent of the portfolio as of March 31. That’s up just marginally from 3.1 percent the company spotted on the same date a year ago.
Meanwhile, GM Financial indicated its accounts more than 60 days delinquent came in at 1.4 percent of the portfolio at the close of first quarter both this year and last year.
And annualized net credit losses registered at the same reading on a year-over-year basis, both settling at 1.8 percent of average consumer finance receivables.
“I want to remind everybody that we do expect to see a mild decline in those rates as we go throughout 2015,” GM Financial president and chief executive officer Dan Berce said. “And going forward, we do expect to see our credit metrics, both delinquencies and losses, to show an improvement, mainly because we are originating a bigger mix of prime today as I showed you a few slides ago.
“In fact, the average FICO score for our March 2015 quarter originations were some 50 points higher than the origination mix a year ago,” Berce continued.
Along with traditional installment contracts, GM Financial is originating more leases. Operating lease originations of GM vehicles came in at $3.0 billion in Q1, up from $2.1 billion in the fourth quarter and $773 million in the first quarter of last year.
Leased vehicles totaled $8.9 billion as of March 31 as now GM Financial is the exclusive lease originator for GM vehicles. Buick and GMC came into the platform in February and Cadillac in March. Chevrolet joined the platform just before GM Financial closed its first quarter.
The company’s Q1 consumer loan originations came in at $4.1 billion, up from $4.0 billion in the previous quarter and $3.4 billion in the year-ago quarter.
GM Financial’s outstanding balance of consumer finance receivables totaled $25.6 billion when Q1 closed.
“The increases were mainly concentrated in vehicles sold by GM dealers, with big increases in loans originated on new vehicles for GM dealers as well as used vehicles. Those increases were led by the fact that our prime lending has now reached $467 million for the quarter, up from $292 million in the December quarter,” Berce said.
Meanwhile, the GM Financial’s AmeriCredit-branded business — vehicles the company finances that are sold by non-GM dealers — remained steady on a sequential basis at $700 million but slightly lower year-over-year.
“We continue to maintain strong discipline on both credit and pricing and loan structure in that business, despite the fact that competition was probably a little bit heightened in the first quarter compared to what we saw in 2014,” Berce said.
Looking over at GM Financial’s commercial business, the company’s outstanding balance of commercial finance receivables stood at $7.6 billion when Q1 finished. That figure is down slightly on a sequential basis ($8.1 billion) but up a bit year-over-year ($7.1 billion).
“The commercial business, it's pretty darn competitive and pretty price sensitive, so we are not in any way, shape, or form trying to artificially create share through price or otherwise. We are letting the business come our way because we are the captive,” said Berce of this segment of GM Financial’s business that is used by 530 dealerships.
“I think we will continue to see steady growth, that 40, 50, 60 dealer-adds a quarter. Again, for the first time we've got a full portfolio of product now, so I think that will help us competitively, whereas before we really had one hand tied behind our back,” he went on to say.
All of those performance elements combined to help GM Financial generate net income of $150 million for the quarter, up from $145 million a year earlier.
The company also mentioned it had total available liquidity of $10.9 billion as of March 31, consisting of $2.1 billion of unrestricted cash, $7.2 billion of borrowing capacity on unpledged eligible assets, $0.6 billion of borrowing capacity unsecured lines of credit and $1.0 billion of borrowing capacity on a Junior Subordinated Revolving Credit Facility from GM.
“We do believe that our growth in this business will continue to accelerate as we go into 2015 and 2016, because for the first time GM Financial now has a complete suite of products in the U.S. And our penetration in those products, whether it's U.S. lease, U.S. prime continues to increase,” Berce said.
“Again, we believe we had a very solid quarter highlighted by the successful execution of GM lease exclusivity in the U.S., which resulted in strong growth in our lease portfolio in U.S., coupled with continued growth in our prime,” he continued. “Our funding plan is on track globally. And despite the investments we have made in the balance sheet and infrastructure to achieve full captive status, we did hold earnings constant year-over-year.
“We do believe the investments that we are making now will pay off in the future. We expect 2016 and beyond profitability to increase at a nice rate from 2015. All in all GM Financial is well-positioned for future growth and increases in profitability, while we maintain a strong balance sheet and support for GM,” Berce went on to say.
