The latest data from Equifax showed the number of subprime auto financing originations climbed for the fifth year in a row, surpassing 7 million contracts for the first time since 2007.
Analysts indicated the number of subprime contracts for 2013 came in at 7.3 million, up from 6.6 million a year earlier. Back in 2007, the subprime origination amount was 7.8 million, off slightly from the recent high of 8.1 million set in 2006.
“In 2013, the independent auto finance companies, the non-bank, non-captive, non-credit union companies, really led the way,” said Lou Loquasto, Equifax’s auto finance vertical leader.
Loquasto explained to SubPrime Auto Finance News what is providing the fuel for this continued subprime resurgence.
“We’ve seen new companies come into the market and private equity investing a lot into the market. That’s reflecting in the data,” he said.
“It’s because that’s where the highest yields are. These private equity companies can invest in anything they want. When they decide to invest in auto, it’s always in subprime auto because they’re chasing the highest yields,” Loquasto went on to say.
Equifax most recent data also showed that finance companies are putting more faith in subprime consumers since the loan cap for these contracts ended up above $18,000 in December — the first time that’s happened since December 2006. The cap stood at $18,120 in December 2013, marking a significant five-year rise since bottoming out at $14,753.
Loquasto insisted that climbing cap number is a “sign of health,” in the subprime auto finance sector. He noted that as applicants come from deeper into the credit spectrum, finance companies often consider a credit score as a smaller piece of the decision to book the deal and for what terms.
“What’s happening in the subprime market, the lenders are being more sophisticated and precise as to what subprime borrowers they make loans to,” Loquasto said. “They’re using a lot of other data like income data, employment data and length of time on their job and other alternative data.
“They might be lending more money to that 540 FICO score borrower, but they’re doing it because they know that this guy does make this much in verifiable income a month and they have been on their job for say, eight years. And the alternative data is showing they’re paying their cell phone bill, their cable bill and other utilities, data that a lot of these lenders didn’t have access to before,” he continued.
“It’s more of a reflection of auto lenders using more tools and being able to be more sophisticated in how they lend to that segment. It’s more than just a credit score,” Loquasto added.
With more tools at their disposal, Loquasto is confident subprime originations will stay on their current trajectory.
“We’re thinking it will continue to grow but maybe not at the pace that it’s been growing. We’ll probably continue to see a very methodical increase, eventually getting back to the 2006, 2007 levels,” Loquasto said.
For the first time this year, some dealers are seeing finance companies pull back in their willingness to complete contracts.
According to the latest dealer survey from KeyBanc Capital Markets, the financing outlook still remains favorable as 50 percent of the firm’s survey respondents reported banks and finance companies were becoming more aggressive in lending during the month of February. Meanwhile, 42 percent of participating reported no change from the prior year.
However, the remaining 8 percent reported a pullback, the first time that trend appeared in a KeyBanc survey in several months.
Perhaps the metric is an anomaly as analysts reported a majority of respondents — 58 percent to be exact — indicated that financing for subprime borrowers is loosening further while 33 percent indicated no change in the subprime lending availability. Only 8 percent indicated a tightening in the subprime market.
KeyBanc also reported that survey participants noted used-vehicle gross profit per unit remained positive in February as 67 percent of its respondents indicated an increase of more than $50 per unit year-over-year. Analysts said another 17 percent indicated flat year-over-year results and another 17 percent reported a decline of more than $50 per unit.
“Some new- and used-vehicle sales were lost to disruptive winter weather in Q1 and weather impact remains evident in early March in line with our expectations, however we remain confident that demand will rebound as the weather improves and some sequential improvement is evident in March as 42 percent of our survey respondents indicated volumes were accelerating and our full year earnings estimates remain unchanged,” KeyBanc analysts said.
“Weather impact remained evident in early March as 42 percent of our survey respondents indicated volumes were relatively the same with February’s weaker levels,” they continued. “However, it is reasonable to anticipate some improvement as another 42 percent of respondents indicated various levels of sequential acceleration, in line with and above seasonal trend. The remaining 16 percent continued to indicate a sequential deceleration,” they went on to say.
The staff at Black Blook Lender Solutions envisions underwriting personnel at finance companies watching two computer screens when evaluating an application that arrives from a dealership in their network. One screen shows the applicant’s complete credit history. The other monitor shows the depreciation history and projections for the vehicle expected to be attached to that contract.
“If it’s not happening, it should be,” said Jared Kalfus, the vice president of data licensing at Black Book.
“Data is really becoming paramount and becoming more integrated into that decision-making process,” Kalfus continued. “If you look at it from different angles and benefits you can receive, the data should be analyzed from many different views. You can leverage that data to spot opportunities that might not have been so obvious and new opportunities that might have been easily identified.
“The analytics really help those lenders find new profit centers with vehicles they might not have historically looked at or shied away from,” he went on to say.
Black Book reached out to SubPrime Auto Finance News to continue the discussion generally being dubbed, “the new normal.” It’s a theme that dominated conversations earlier this year when the American Financial Services Association conducted its annual Vehicle Finance Conference. Recent data from J.D. Power and Experian Automotive indicates finance companies are booking more loans at 72 months — maybe even longer — and loan-to-value ratios are climbing.
Black Book editorial director Ricky Beggs believes these trends go back even further than when the calendar flipped to 2014.
“In the last two years during a lot of conversations, similar concerns that pop up are the length of these loans and their loan to value ratios that are out there,” Beggs said. “And because the vehicles are being collateralized a little bit higher, that puts even more questions out there. Then you add in the competition between the lenders. They’re getting pressed and pushed to make more loans to make more profit and get that loan on the books.”
So how do finance companies navigate this ‘new normal’ that doesn’t appear to be going away any time soon? Black Book insisted its Collateral Insight Engine can be a tool to leverage. Product manager Brett Collett ran through some examples with SubPrime Auto Finance News this week to give finance companies some hard figures to consider.
Collett explained a finance company might sustain a $500 loss if a $25,000 loan with a 60-month term and a 4-percent APR ends up in a recovery situation after two years. That loss can balloon up to $3,500 if the term originated was at 84 months but went into recovery at the same junction.
Collett insisted that risk can be mitigated if finance companies can get a better grasp on the collateral value retention projections before even delving into terms that long; again that “new normal” financing companies are encountering.
“That’s a huge spread and risk that those lenders are taking with this pricing competition, and that’s assuming a 15-percent depreciation rate,” Collett said. “But as we all know each vehicle depreciates differently. Understanding the past trends and future projections will determine which side of the fence you might land. Are you going to be in a better position because you’ve got better collateral that you can put longer terms on? Or are you going to be in a worse position because you took riskier collateral with those longer terms?
“Lenders all have proprietary credit models but they rely on a lot of the same data,” he continued. “Having collateral inside that mix can mean the difference between a profitable decision in this ultra-competitive environment versus non-profitable decisions.”
According to Black Book data, used vehicles from the model years 2008 through 2012 depreciated by 1.1 percent overall in February, showing stronger seasonal retention compared to the 1.9 percent rate decline in January.
Beggs indicated average pre-recession depreciation is historically between 1 percent and 2 percent monthly, and Black Book expects overall 2014 depreciation of 13.5 percent.
Beggs also emphasized this time of year is when finance companies should pay extra attention to vehicle depreciation trends. He offered an example of what’s been happening recently with entry-level models, both compacts and midsize cars.
“Overall those are not segments that we feel like are going to be very strong segments retention wise for the overall year,” Beggs said. Some of the reasons are the volume of those vehicles in the marketplace, more players in those segments because of (Corporate Average Fuel Economy) requirements, and the level of gas prices we have right now and what are expected for the rest of the year being stable in relation to what we saw in 2008 and 2009.
“But if you look at the last three weeks, those segments have actually done the best in retention or lack of depreciation,” he continued. “That’s being driven primarily because of this time of the year, the tax season market. These are the lowest priced average cars out there so they fit well in that buy-here, pay-here and subprime market that gets a lot of attention in tax season.
“The fact that you’ve got a difference right now in what these segments should be overall for the year becomes important to see and that’s what Collateral Insight Engine looks at from the big picture,” Beggs went on to say.
Beggs closed with one final point about why finance companies need to monitor vehicle deprecation.
“If you look at dealer side, they have a good grasp of the cars based on their experience of what they’re buying and selling,” Beggs said. “When you look at it from the lender side, they don’t know the car itself but they know lending. They need to be able to depend on analytics to complement their lending experience to determine what is the good risk.”
Here is the complete breakdown of Black Book recorded February value changes of used vehicles for model years 2008 through 2012:
| Bodystyle |
3/1/13 |
2/1/14 |
Sequential Change |
3/1/14 |
Annual Change |
| All Vehicles |
$21,051 |
$18,342 |
-1.1% |
$18,137 |
-13.8% |
| Domestic Car |
$14,389 |
$12,316 |
-0.6% |
$12,244 |
-14.9% |
| Domestic Truck |
$19,233 |
$17,000 |
-0.9% |
$16,845 |
-12.4% |
| Import Car |
$22,633 |
$19,403 |
-1.1% |
$19,191 |
-15.2% |
| Import Truck |
$23,423 |
$20,759 |
-1.5% |
$20,452 |
-12.7% |
| Minivan Cargo |
$10,955 |
$9,386 |
-3.4% |
$9,068 |
-17.2% |
| Full-size CUV |
$25,240 |
$21,544 |
-2.0% |
$21,105 |
-16.4% |
| Midsize CUV |
$21,663 |
$18,815 |
-2.0% |
$18,446 |
-14.8% |
| Compact CUV |
$15,220 |
$12,981 |
-1.5% |
$12,784 |
-16.0% |
| Midsize Pickup |
$18,304 |
$16,889 |
-1.5% |
$16,638 |
-9.1% |
| Midsize SUV |
$20,546 |
$18,005 |
-1.3% |
$17,765 |
-13.5% |
| Entry Level Car |
$8,881 |
$7,399 |
-1.3% |
$7,303 |
-17.8% |
| Prestige Luxury Car |
$41,472 |
$34,796 |
-1.3% |
$34,351 |
-17.2% |
| Luxury SUV |
$38,775 |
$34,437 |
-1.2% |
$34,028 |
-12.2% |
| Premium Sporty Car |
$53,286 |
$46,797 |
-1.2% |
$46,248 |
-13.2% |
| Near Luxury Car |
$21,007 |
$18,189 |
-1.2% |
$17,979 |
-14.4% |
| Compact Pickup |
$16,224 |
$15,215 |
-1.1% |
$15,047 |
-7.3% |
| Upper Midsize Car |
$12,918 |
$11,023 |
-1.1% |
$10,902 |
-15.6% |
| Luxury Level Car |
$23,982 |
$20,658 |
-1.0% |
$20,445 |
-14.7% |
| Sporty Car |
$21,957 |
$18,879 |
-0.9% |
$18,710 |
-14.8% |
| Compact Car |
$10,752 |
$9,130 |
-0.9% |
$9,051 |
-15.8% |
| Compact SUV |
$17,023 |
$15,963 |
-0.8% |
$15,828 |
-7.0% |
| Minivan Passenger |
$14,772 |
$12,745 |
-0.8% |
$12,638 |
-14.4% |
| Full-size Pickup |
$24,702 |
$23,165 |
-0.7% |
$23,010 |
-6.9% |
| Full-size Cargo Van |
$14,116 |
$12,384 |
-0.5% |
$12,327 |
-12.7% |
| Entry Midsize Car |
$12,788 |
$10,611 |
-0.5% |
$10,563 |
-17.4% |
| Full-size SUV |
$22,998 |
$20,430 |
-0.4% |
$20,342 |
-11.6% |
| Full-size Car |
$15,265 |
$12,887 |
-0.4% |
$12,841 |
-15.9% |
| Full-size Pass. Vans |
$14,711 |
$12,804 |
-0.2% |
$12,774 |
-13.2% |
Experian Automotive’s most recent data showed how much more risk captive lenders are taking in regard to loan-to-value (LTV) levels when booking contracts for used models.
Experian indicated LTVs for captives that financed used vehicles in Q4 jumped by 306 basis points to an average of 128.6 percent. That year-over-year increase was far more than what Experian noticed for credit unions (up 136 basis points to 135.8 percent) and finance companies (up 115 basis points to 152.4 percent).
Overall, analysts found that LTVs for used-vehicle financing rose 113 points to 133.8 percent.
On the new-car side, Experian determined credit unions pushed their LTVs up the most during the fourth quarter, increasing them by 212 basis points to 115.3 percent. That basis-point amount recorded by credit unions nearly quadrupled the market average, which moved up 56 basis points year-over-year to 110.4 percent.
Looking at the LTV data by consumer credit category, Experian’s data showed the overall aggression in the market to make deals with buyers with damaged credit histories and more negative equity.
For deep subprime — consumers who Experian said have credit scores below 550 — LTVs soared the most year-over-year for both new- and used-vehicle financing. For new, the increase came in at 301 basis points to 126.0 percent, and for used, the jump registered at 220 basis points to 149.2 percent.
The other credit categories outside of prime posted similar increases during the fourth quarter according to Experian, including:
—Subprime new: up 234 basis points to 125.5 percent
—Subprime used: up 164 basis points to 142.3 percent
—Non-prime new: 143 basis points to 122.2 percent
—Non-prime used: up 110 basis points to 136.8 percent
The LTV data dissected by Experian conveyed a similar trend shared in the most recent dealer survey conducted by KeyBanc Capital Markets.
KeyBanc reported that financing availability remains strong as majority of the dealer respondents — 56 percent to be exact — indicated banks and finance companies were becoming more aggressive in January and the remaining 44 percent indicated no change from a year earlier.
The survey results also showed financing for subprime borrowers continued on a positive trend as 60 percent of the dealer respondents indicated favorable conditions remained unchanged and the remaining 40 percent indicated subprime financing continued to loosen in the month of January.
More than a dozen trends arose when CarFinance.com examined its full-year financing data to find out the Top 10 new- and used-vehicle choices for its below-prime vehicle buyers in 2013.
On the new-model side, CarFinance.com discovered the list of most purchased vehicles diverges completely from the overall Top 10 selling vehicles in the U.S.
The site indicated that Kia, a brand known for affordable, fuel-efficient vehicles, dominated its below-prime new-vehicle list, offering the automaker what analysts contend is “an important opportunity to develop loyalty among this customer base as it moves upstream.”
CarFinance.com mentioned Chevrolet performed well in both new and used below-prime categories.
Overall, the site pointed out below-prime buyers continue to purchase new compacts, used trucks and affordable vehicles that may not have a flashy pedigree, but offer great value.
“The CarFinance.com Top 10 Lists offer a snapshot of the vehicle preferences of consumers credited with helping drive U.S. auto sales growth,” CarFinance.com chief executive officer Jim Landy said.
“The automaker brands that show up on these lists should take note: today's below-prime car buyer — who is already re-building credit with a car purchase — could be your brand-loyal prime customer of tomorrow,” Landy continued.
The Top 10 New Vehicles Purchased by Below-Prime Buyers
1. Dodge Avenger and Kia Optima (Tied)
2. Kia Forte
3. Ford Focus
4. Kia Soul
5. Dodge Journey
6. Chevrolet Malibu
7. Chevrolet Cruze
8. Chrysler 200
9. Kia Rio
10. Nissan Sentra
Among the trends, analysts found when compiling the new-model list:
• Compact cars that offer good fuel economy and value in their class heavily dominated the list.
• With four models on the list, Kia “definitely is hitting a mark with this segment. Its range of product is resonating with this buyer,” analysts said.
• More domestics (6) made the list than imports with Kia and Nissan as the only import brands in the Top 10.
• No SUVs or trucks made the list, although the Kia Soul offers an 'SUV-like' vehicle without the expense of actually being one. And the Dodge Journey with a three-row seat option offers family-friendly space, more affordably than the average mini-van.
• Below-prime buyers snapped up the great deals offered by dealerships as they moved the 2013 Malibu off their lots to make way for a design update.
• The most popular vehicle with these consumers, the Dodge Avenger, is an often overlooked midsize sedan that performs well at a competitive price
• The Chrysler 200 is a natural for the list given that it is essentially the same vehicle as the Dodge Avenger: different design but similar incentives.
• Ford Focus is “no surprise” in third place, according to the site, which added, “It’s a well-designed, competitively priced compact, available as a sedan or hatchback, with appeal as a great ride even at the most basic and affordable trim level.”
• The popularity of the Optima, Soul, Rio and Forte, which offer 10-year/100,000-mile warranties, indicate that not only are fuel economy and pricing probably key to this buyer, but so are longer manufacturer warranties
Top 10 Used Vehicles Purchased by Below-Prime Buyers
1. Nissan Altima
2. Chevrolet Silverado 1500
3. Ram 1500
4. Ford F-150
5. Chevrolet Impala
6. Dodge Charger
7. Toyota Camry
8. Chevrolet Malibu
9. Honda Accord
10. Ford Fusion
Among the trends, analysts found when compiling the used-model list:
• The used story is one of trucks and domestic sedans and import sedans that hold their value.
• Domestics (led by Chevrolet) overwhelmed imports with only three import models, Altima, Camry (top-selling sedan in the U.S) and the Accord, cracking the Top 10.
• Unlike the new-vehicle list, which lacks trucks or SUVs, it’s no surprise to see three trucks near the top here, given their overall popularity in the market, their longevity and the value they offer as pre-owned vehicles.
• Chevrolet Impala and Dodge Charger show up as strong choices for consumers looking for larger cars at more affordable prices.
From captive finance companies to one-lot buy-here, pay-here dealers, the entire industry is seeing a shift to a ‘new normal,’ which includes smaller down payments, longer terms and negative equity being rolled into a larger financed amount.
While metal is being moved now, trends and buying patterns that might appear three years or more down the road are what industry observers are currently pondering.
“As we shift over to the ‘new normal,’ which is a little bit concerning, right now the belief is the typical consumer goes $400 to $500 on a new car and $300 to $400 on a used car as the monthly payment,” Experian Automotive president John Gray said.
“So how do you get them the most car in that payment structure? As the interest rates have come down, the prices have gone up so you move out the financing,” Gray continued. “The question is still going to come in as interest rates go up in the future, can you put still put a rate out there that puts them in that payment structure? Also, you’re in the car longer so how can you get equity in the car? Is this going to cause the auto industry to think about when people are going to come back into the market?”
Gray’s Experian colleague is considering the same kinds of questions.
Senior director of automotive credit Melinda Zabritski said, “You’ve got extended (loan to value) and loans. Will consumers change their owning patterns?
“For years, consumers would take their car and trade it back in every 36 to 38 months,” Zabritski continued. “It cut back during the recession. But if the consumer still expects to return to market in 3½ years and they’re on a 72- or 84-month loan with a high origination LTV, are they in a position to come back into the market unless LTVs also continue to expand out?”
The latest data from Experian as well as J.D. Power showed these questions aren’t going away any time soon.
According to its latest State of the Automotive Finance Market report, Experian indicated the average amount financed for a new vehicle was $27,430 in Q4 2013, up from $26,691 in Q4 2012. This marked the highest average loan amount for a new vehicle since 2008 and the first time the amount has exceeded $27,000.
Additionally, the average loan amount for a used vehicle during the quarter was $17,974, up $345 from the previous year, which was also a record-high since 2008.
Furthermore, Experian determined new-vehicle interest rates were up to 4.37 percent in Q4 2013 from 4.36 percent in Q4 2012, while used-vehicle interest rates were up to 8.71 percent in Q4 2013 from 8.48 percent in Q4 2012
And the latest analysis from J.D. Power showed long-term loans — classified as loans that are 72 months and longer — accounted for 33.1 percent of new-vehicle retail sales in February, according to data gathered by the Power Information Network (PIN) from J.D. Power.
That pace surpassed the previous record set in September 2012, when 30.6 percent of new-vehicle sales were loans of 72 months or longer.
“Longer loan terms, coupled with the current low interest rate environment, increases the affordability of new vehicles for consumers,” said Thomas King, senior director of PIN at J.D. Power. “This is resulting in strong demand for new vehicles and also record transaction prices.”
King noted that while the increased use of long-term loans has caused concern in the automotive industry about the risks associated with extended purchase cycles, those risks are mitigated by a couple of factors.
First, while 72-month loans are becoming increasingly popular, loans for 24 to 60 months are keeping the average term for new-vehicle loans at 66 months, an increase of only three months since 2009. Second, increased leasing, with typical contract lengths of just 36 months, ensures a healthy supply of future vehicle buyers with shorter purchase cycles.
“Unlike buyers who finance their vehicle and have considerable discretion regarding when to return to market, consumers who lease their vehicle must come back into the market when their lease terminates,” said King. “The current level of leasing means there will be a steady and significant stream of lessees returning to market three years from now.”
J.D. Power also pointed out that while loans of 84 and 96 months are available to consumers, analysts contend such loans have yet to compose any meaningful portion of the auto financing market, with 84-month and longer loans comprising only 3 percent of all sales in February.
