“The auto industry enjoyed another record-breaking year in 2016, but dealers expect a drop in sales this year, perhaps boosting car buyers’ negotiating power,” notes WalletHub’s Q1 2017 Auto Financing Report.
The report outlines the following influential key points for buyers and lenders alike in today’s auto market:
This week, an overview of the auto market landscape. From interest rates to fraud risk, understand a variety of perspectives from the financial industry, manufacturers, and consumers as you formulate your auto lending strategy for 2017.
‘Car designers are just going to have to come up with an automobile that outlasts the payments.’ --Erma Bombeck, humorist
“Automakers Up Incentives for January,” notes a CUNA blog post. January auto sales dipped 1.8% from the prior year, despite additional discounts and incentives from manufacturers, many of whom hoped to move vehicles in the slump.
“It is anticipated that auto sales will finish 2017 above 7 million vehicles,” still trailing the prior two years, nonetheless.
Incentives were up faster than overall transactions, says one expert, due to inventory glut. On average, incentives per sale hovered around $3,635 in January, up 21.6% from January 2016.
About 10% of loans issued were interest-free, up from 8% last year.
According to Forbes, “Auto Loans Remain Easy To Get (Mostly) For 2017.” Banks defined auto credit at a recent National Automobile Dealers Association convention as “the ability for the consumer to purchase what they want to purchase,” a difficulty for many during the tight credit environment of the economic downturn.
However, the present-day picture is rosier with current consumer demand, low rates, low defaults and delinquencies, and “easy approvals even for risky customers.”
Lenders are starting to exercise more caution, in particular with issuance of riskier subprime loans.
In fact, the number of subprime consumers buying used vehicles hit record lows, in part due to prime borrowers choosing to buy used instead of more expensive new cars.
Do you know the auto loan rate forecast for 2017? According to bankrate.com, the best rates are expected to stay around “the low threes” for buyers with good credit. More typically, rates on average will be on the upswing.
A Bankrate economist predicts average rates will grow to 4.5% on new vehicles to 5.2% for used. A chief economist at automotive pricing website TrueCar anticipates that with Fed funds increases, interest rates on cars will respond with an uptick, though it will take some time to reach commercial lenders.
It is expected auto lending will be “very favorable.”
‘I think there’s a difference between a gamble and a calculated risk.’ –Edmund H. North, American actor
A variety of opinions exists on the ability of borrowers to repay auto loans, and likely consequences resulting from such circumstance.
“Americans are Struggling to Pay Off Their Auto Loans,” says the New York Post. Delinquencies in the fourth quarter were at “their highest level since the financial crisis,” per a report from the New York Federal Reserve.
As of year-end, $23.27 billion in loans were at least 30 days late. This is up 14% from the prior year and the biggest since Q3 2008, when $23.46 billion in loans were delinquent.
“Greater access to auto loans for non-prime customers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfolio,” says Jason Laky, an automotive and consumer lending business leader at TransUnion.
The Fed is concerned about subprime loans issued to those with credit scores below 620.
“Almost all borrowers with credit scores above the subprime cutoff of 620 are ‘performing very well,’” the article says.
The median credit score on all car loans was up to 763 in Q4 2016, up from 753 the previous year.
Average debt per borrower reached $18,391, and TransUnion expects delinquencies will grow.
“There’s No Crisis in the Auto Loan Market,” says American Banker. In considering the overall auto lending market, one must look beyond the growth in delinquencies, the article notes.
“This doesn’t signal a pending disaster for the auto finance market.”
The number of loans issued grows, and a natural consequence is an uptick in delinquencies.
The market has reacted to the trend by cutting back on the number of subprime and deep-subprime loans issued.
The result is on average, credit scores are up for new and used car loans.
“We don’t see an inordinate amount of exposure within subprime originations, as lenders typically have around 14% of what they originate in subprime,” says Melinda Zabritski, senior director of automotive credit at Experian. “Currently we are at 12%.”
Another article at American Banker explores lender perspective on subprime in greater depth.
JP Morgan dropped auto loan originations by 13% during Q4; meanwhile, Wells Fargo noted increases in five of six quarters preceding a 16% drop in the fourth quarter.
“To respond to conditions in the competitive landscape and to maintain our risk tolerances, we’ve tightened our underwriting standards,” says Wells Fargo Chief Financial Officer John Shrewsbury.
Auto lending climbs, reaching a record high of $1.14 trillion in Q3 2016. This is an increase of 61% from six years prior.
“The question is now how long can that level of growth be sustained,” says the article.
Longer term loans are offered to make payments affordable, and with that, risk to lenders rises because in event of default, vehicles will be worth less with increased mileage.
Also, yields drop on auto loans, down from 7% in 2010 to 3.5% in Q4 2016; another reason lenders pull back.
A further issue for lenders is that auto lending fraud risk is on the rise.
“PointPredictive Sees Auto Lending Fraud Risk Reaching $6 Billion in 2017,” says a recent press release. Hidden fraud is an important part of auto loan risk.
According to Frank McKenna, Chief Strategy Officer of PointPredictive, “Early Payment Defaults range between one percent and three percent of all originated loans for the typical auto lender. We are finding that up to 70% of those loans that default on the first payment or within the first six months…have fraudulent misrepresentation in the original application.”
Such misrepresentation may be found in borrower’s income, identity, or employment. Vehicle price and condition may also be misreported.
Many circumstances influence the auto lending environment: Interest rates; manufacturer incentives and inventory; employment; fraud; and consumer demand are but a few.
What unique variables impact your auto loan portfolio?