The first several months of 2015 have brought fears and concerns that the automotive lending market faces another subprime bubble like we saw back in 2008. In reality, based on what we have seen at Dealertrack, the credit picture is good for the American consumer, and there is no subprime lending bubble in automotive retail today.
Unlike when the bubble collapsed seven plus years ago, today’s market, especially in automotive lending, is healthier than it was in the months leading up to the recession. Dealers are selling more vehicles with much of that growth fuelled by financing, yet lender’s loan portfolios, including subprime lending, are performing very well.
We have seen some pull back from some larger lenders in the subprime lending market, but believe that is more related to greater regulatory oversight and compressing of lender margins than extreme caution of portfolio risk, or fear of a sequel to the 2008 financial crisis.
In fact, we are seeing more subprime lenders stepping up to fill the void created by the pull back of some big lenders in this segment of the market. Specifically, the number of lenders in this subprime space has increased by 100 percent on the Dealertrack Credit Application Network in just five years.
Since 2011, 82 percent of all lenders added to the Dealertrack network lend at least partially in the non-prime market. In addition to an increase in the number of lenders, we are seeing an increase in the number of credit application submissions per unique customers, further signaling the expanded availability of financing supply in the market today.
Vehicle Supply and the Lending Market
Used car demand has been very steady and growing as the supply of used cars continues to rise. As this supply continues to recover, lenders are looking to help more and more consumers purchase vehicles. The opportunity for used car financing remains strong.
Experian Automotive recently reported that overall automotive loans continue to grow, reaching a record high of $905 billion in the first quarter of 2015, an 11.3 percent increase from the first quarter of last year. In fact, car loans, in general, remain a modest part of the lending market compared to the $8 trillion mortgage loan market, which was a major contributor to the implosion of the last subprime loan bubble several years ago.
Typically, we see a fluctuation in overall subprime applications during the tax refund season. This year, despite severe weather in the Northeast earlier in the year and most recently in Texas, which contributed to a slight shift in the seasonal automotive finance curve, subprime applications remain consistent with 2013 and 2014 numbers.
The prime and subprime markets continue to be the segments driving overall automotive finance growth. However, prime credit lending still outweighs subprime lending in today’s market. The non-prime market is a stable portion of the total automotive loan originations.
Based on the credit applications submitted through our automotive finance network, subprime submissions have remained at about 1/3 of the total number of credit applications that we receive today, compared to 58 percent in 2007. Also, Experian Automotive stated this month that subprime loans made up only 19.7 percent of market in the first quarter – the lowest share of the market since 2012.
As for subprime loan approvals, they continue to climb. We have seen subprime approval rates slowly climb since 2010, and early 2015 results indicate higher trending approval rates for subprime than in the previous three years.
In addition, while we are seeing an increase in financing terms and amounts within the Dealertrack network, with relatively flat monthly payments across all loan types for the past several years, we are seeing no evidence of rising “loan to vehicle value” stats, which is a key metric in determining the market’s ability to absorb these slightly longer finance terms.
Bright Future for Automotive Lending
While today’s financing markets and consumer confidence are a lot better than in 2008, dealers and lenders still need to be vigilant and prudent when it comes to helping keep lending at healthy and robust levels. Based on our experience, we expect that subprime lending, and automotive lending in general, to continue to be strong for the remainder of 2015 and into 2016, especially as used car supply continues to recover and grow.
Raj Sundaram is co-president of Dealertrack Technologies.