SCHAUMBURG, Ill. — Taking an in-depth look into Experian Automotive's Auto Finance Study called "Riding Out the Storm," SubPrime Auto Finance News discovered some important trends, including the fact that auto loan delinquencies are climbing, with more than $25 billion past due.

"The economy continues to force lenders to tighten their loan criteria while consumers are faced with increased difficulty in repaying those loans on time," explained Scott Waldron, president of Experian Automotive.

"Our data has shown a clear pattern of rising past-due loans in the auto industry, where even a slight increase in delinquent loans severely affects the industry by accounting for hundreds of millions of dollars in unpaid debt," he added. 

Going into the study, it offered a breakdown of lender categories.

The data kicked off with captive lenders, which have more than 19.3 million loans had the greatest number of open loans, as well as the highest dollar balances at $262.1 billion.

"And while captive lenders hold more automotive loans than other lenders, they typically finance greater dollar balances than other lenders," according to the study. "One reason for this is the greater focus for new-car financing."

Basically, for the first six months of this year, 71 percent of captive loans were on new vehicles. Looking at both new- and used-vehicle loans, Experian found that the average amount financed for captives by end the second quarter was $22,901.

Continuing on, Experian Automotive indicated that the next biggest lending segment are banks, with more than 18.1 million in loans and $224.3 billion in outstanding. Even though banks finance both new and used units, officials said the greater number of used vehicles covered by this segment leads to a lower average amount financed of $19,602.

Meanwhile, taking a look at credit unions, the company said these lenders hold more than 13.8 million of loans with more than $159.2 billion in outstanding balances. Covering both new and used loans, credit unions average $18,278 financed on a deal.

Finally, holding more than 13 million of loans worth more than $149.6 billion are finance companies. According to executives, these companies tend to focus on lending in the higher-risk markets; therefore average loan amounts are traditionally lower than other lenders. Covering both new and used vehicles, the average amount financed comes in at $17,110 for this category.

Reviewing the last nine quarters, Experian discovered that the shift was most significant for finance companies and captives, while credit union business maintained steady ground.

"Banks reached a peak market share of 31 percent during the first half of 2007. Beginning in the third quarter of 2007, banks returned to market share levels prior to the 2007 peak periods," officials pointed out.

"Despite recurring incentive programs, the captive segment has experienced a steady decline in overall market share. Since the second quarter of 2006, captive share has declined 9 percent to represent 30 percent of all automotive lending," they continued.

Why the change? Well, according to Experian, back in 2007 many banks made some changes to their services. Basically, they began buying into higher-risk consumer markets and as performance on these loans deteriorated, they started to revamp their lending programs this year and many pulled out of these markets. This led to this segment's overall market share to return to about 28 percent.

As for credit unions, they tend to maintain dealer relationships and lending programs, which generally keep their market share around 21 percent.

Who had the largest market share growth? That would be finance companies.

"Since the second quarter of 2006, this market has grown a dramatic 20 percent. Finance company growth goes hand-in-hand with their changes in lending programs," executives explained.

"As banks and other lenders began to restrict lending in the higher-risk markets, finance companies embraced these loans. While other lenders typically lend 55 to 70 percent of their loans to the prime market, finance companies have significantly expanded their lending in the higher-risk tiers, resulting in an average of 20 percent of lending in the prime risk market," the company continued.

Credit Breakdown

Before delving further into credit trends, Experian first identified which scores fall into which categories: Prime covers 680 plus; non-prime includes 620 to 679; subprime covers 550 to 619; and below subprime includes any score less than 550.

As traditionally found, the largest percentage of loans fall into the prime segment; however, the company said the number of these loans have been deteriorating over the last few years due to consumer credit challenges in the auto finance market.

More specifically, prime auto loans dropped 8 percent after reaching a peak in the first half of 2007.

Currently, 56 percent, or more than 36 million auto loans, fall into the prime category.

Next up is non-prime, which has more than 9.9 million loans and $124.6 billion in outstanding balances, making it the second largest of the credit tiers.

"This tier reached a market share low of 13.7 to 13.3 percent from the fourth quarter of 2006 through the third quarter of 2007, but has since returned to its share of 15.4 percent of all open automotive loans," executives highlighted.

As for the subprime category, more than 9.4 million loans fall into this area, covering more than $110.9 billion in outstanding balances. Like the non-prime category, these loans hit a peak of 15 percent in the third quarter of 2007 and have since fallen off to about 14.6 percent of all open auto loans.

Finally, Experian looked at the below subprime tier.

"As of the second quarter of 2008, over 8.6 million automotive loans worth over $99.4 billion fell into this risk tier," officials pointed out. "This is also the tier experiencing the greatest growth over the last several years. Since the second quarter of 2006, the below subprime tier has grown 43 percent to now represent over 13 percent of all open automotive loans."

Loan Originations and Payments

Overall, originations have been declining over the last several quarters. For instance, over the last two years, originations dropped 14 percent to 4.42 million in the second quarter of this year.

"And while cyclical in nature, the year-over-year comparisons for loan originations in on the decline in 2008," the study highlighted.

For the second quarter in the prime segment, 56.3 percent of all loans opened fell into this segment, up 7 percent from the same period in 2006.

"During this same period, the number of open automotive loans decreased in the prime space, leading to the conclusion that while more loans are being originated in prime, they aren't remaining prime," executives explained.

Also growing in originations is the below subprime risk tier. For the second quarter of this year, 9.1 percent of loans fell into this area, up 17 percent.

"As this market grows, the average amount financed, while lately declining, has increased over the last two years," Experian indicated.

Taking a closer look, the company discovered that the average amount financed in the below subprime market climbed $2,326 in 2007, hitting a peak average of $16,721 for the fourth quarter of that year. From that time frame, the amount financed declined $790 to $15,931 in the second quarter of 2008.

As for the prime tier, the study found that the average amount financed peaked in the third quarter of 2006 and then again in the first quarter of 2008.

"Over the past two quarters, the average amount financed in the prime market decreased. The second quarter was down $692 from the first quarter of 2008," executives noted.

"Decreases in the amount financed as resulted in drops in the average monthly payment on newly originated loans," they continued. "Loans originated in the second quarter of 2008 had, on average, monthly payments that were $12.41 less than loans in the first quarter of 2006."

The biggest decrease in monthly payments during 2008 so far has been in the below subprime market, Experian reported. This category saw a drop of 4 percent, or $14.28 decline, in monthly payments, bringing average payments to $380.39, which is just slightly less than the subprime segment.

Loan term has also been declining.

"Despite instances of 84-month and greater loans in the market, the average loan term has been steadily declining," officials said. "The average term for loans originated in the second quarter of 2008 decreased to 60.20 months. Over the last several quarters, the average term hit a peak of 60.98 months in the third quarter of 2006 and a low of 60.16 months in the third quarter of 2007."

Tighter Underwriting

For June through July of this year, Experian discovered that 23 percent fewer loans financed fell below 739.

"Part of this shift is the result of lenders tightening their credit requirements. During this same period, the percentage of loans that scored 740 and above grew 19 percent," according to the company.

Officials went on to point out that these shifts vary by local market.

Interesting enough, the study found that the two vehicle classes with the greatest percentage of prime originations were the CUV entry level segment with 71 percent and the ALT Power – hybrid market, with 90 percent.

As for the below subprime area, the most popular vehicle classes include the SUV – lower mid-range at 25 percent and minivan at 19 percent, the upscale luxury and SUV and upper mid-range, which were both at 18 percent and the SUV large segment at 17 percent.


According to Experian, finance companies tend to be the largest group at risk both in terms of number of loans as well as delinquent balances. For accounts 30-days delinquent, finance companies had 604,967 loans worth more than $7.5 billion for the second quarter of this year.

Next in line were captives, which held 531,663 loans delinquent, worth about $7.53 billion. And finally were credit unions, which had 181,770 loans, worth more than $2 billion.

On a year-over-year basis, delinquency rates grew 9 percent from 2.28 percent to 2.48 percent.

The largest jump occurred in the credit union segment, which saw a 13-percent increase in 30-day delinquencies, brining this group's rate to 1.31 percent in the second quarter.

As for captive and banks, both categories experienced 12-percent climbs, resulting in 2.75 percent and 1.53 percent, respectively.

Also, while finance companies tend to have the highest rate among all groups, looking at the second quarter of last year to the same period of this year, delinquencies showed the lowest increase of 2 percent.

"Just as credit scores vary around the country, delinquency rates vary state-by-state," executives explained. "The Southern part of the country experiences the highest 30-day delinquency rates, with Washington, D.C., having the highest 30-day rate at 3.98 percent followed by Mississippi at 3.76 percent, Georgia at 3.3 percent, South Carolina at 3.29 percent and Alabama at 3.16 percent."

The states with the lowest rates include North Dakota at 1.20 percent, Nebraska at 1.41 percent, Wyoming at 1.42 percent, Idaho at 1.43 percent and South Dakota at 1.46 percent.

"However, despite Wyoming having one of the lowest delinquency rates, these delinquent loans carry the greatest outstanding balance of $15,022," officials noted.

As for 60-days delinquent, 0.75 percent or 483,392 of all open auto loans fell into this category at the end of the second quarter of this year, up 11.9 percent from the same time frame of the prior year. The total worth of these loans is $5.9 billion.

Credit unions showed the highest increase in delinquency at 22 percent to 0.38 percent.

"And while their delinquency rate is the lowest in the industry, there is over $578 million at risk for this market with the industry's lowest average amount delinquent coming in at only $10,978," the study reported.

Captives were next in line with the second highest climb of 18 percent to 0.59 percent.

"Captives also traditionally finance larger amounts than other lenders and have the highest average balance on delinquent loans of $13,979, resulting in over $1.5 billion at risk," officials pointed out.

Meanwhile, banks showed a 9.3-percent jump in accounts 60-days delinquent, coming in at 0.47 percent, representing more than $1 billion at risk.

Finally, not surprising given the risk level, finance companies has the highest delinquency rate at 1.78 percent, up 6.6 percent from the prior year. Also, due to this rate, finance companies have the most at risk, more than $2.7 billion.

States with the highest rates include Washington, D.C., at 1.34 percent; Mississippi at 1.3 percent, South Carolina and Georgia both at 0.99 percent and Alabama at 0.98 percent.

The states with the lowest 60-day delinquent rate include North Dakota at 0.32 percent, Idaho at 0.40 percent, South Dakota at 0.42 percent, Alaska at 0.43 percent and Vermont at 0.44 percent.

However, officials pointed out that Alaska averages the largest balance of $15,099, with Nevada coming in second at $14,671. Maine had the lowest average balance at $9,559.

Explaining the reason behind producing this study, Melinda Zabritski, director of automotive credit for Experian Automotive, explained, "It is important for financial organizations to track these trends to evaluate how current economic forces are specifically impacting their loan portfolios.

"Using outside information and analysis can help lenders understand unique credit patterns in local markets and how these subtle nuances can impact financing in one city versus another," she concluded.