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Auto Loan Delinquency Rate Falls Below 2008 Levels as Borrowers' Credit Scores Rise

Auto Loan Delinquency Rate Falls Below 2008 Levels as Borrowers' Credit Scores Rise

A decade after the Great Recession, delinquency rates are solidly below 2008 levels -- both pre- and post-crash -- as credit scores for auto loan borrowers have consistently risen during the recovery, TransUnion said Wednesday.

At the peak, in the fourth quarter of 2008, 1.64 percent of auto loans were 60 or more days past due. That compares with 1.22 percent in the second quarter of this year and 1.26 percent in the second quarter of 2008 before the economy collapsed.

On the credit score side, 60 percent of auto loan originations in the first quarter of 2008 were to borrowers with a score of 661 or higher, viewed as prime or above by most lenders. By the first quarter of 2018, that share had risen to 65 percent of borrowers.

"As the economy has improved, the consumer credit market has done a remarkable job of getting back to serving consumers with good products, healthy pricing," Matt Komos, vice president of research and consulting for TransUnion's financial services business unit, told Automotive News. "If you think about the lending environment compared to 10 years ago, a lot has changed, with technology, the speed of doing business, expectations of consumers when it comes to how they interact with their loan product. All of those factors have created a healthy ecosystem."

With a delinquency rate of less than 2 percent at peak, the auto loan portfolio performed best among major lending categories in the wake of the recession's start.

Auto Loans Get Priority

Surging delinquency rates mostly occurred in mortgage lending, with a peak of 7.21 percent in the first quarter of 2010. The peak delinquency rate for credit cards was 3.19 percent and for personal loans was 5.05 percent.

"After the financial crisis, consumers were putting auto loans in the high end of that payment hierarchy. They were prioritizing that as a payment to make when it came to potentially having to miss payments on other obligations," said Komos. "Even if they go down to one car per household, it's still important as a mode of transportation."

At the lowest level, in the fourth quarter of 2008, there were 3.5 million auto loan originations, down from 5.2 million three quarters earlier. By the first quarter of 2018, auto loan originations nearly doubled that late 2008 pace to 6.8 million as light-vehicle sales rebounded and lenders became more willing to expand into subprime and near prime credit tiers, Komos said.

Auto loan balances have also nearly doubled from their lowest point in the first quarter of 2010. In the second quarter of 2018, auto loan balances reached $1.2 trillion, compared with $668 billion in the first quarter of 2010 and $773 billion in the second quarter of 2008.

TransUnion expects the 60-day delinquency rate to remain flat through year end, Komos said. Even if there are fluctuations in the economy, "we anticipate that consumers will actually choose to pay autos first," he said.

Q1, Q2 Finance Trends

In the second quarter of this year, the number of auto loans increased 4.5 percent to 80.9 million, while the 60-day delinquency rate improved 1 basis point to 1.22 percent, TransUnion also said Wednesday.

The average auto loan balance, which TransUnion compiled for the first quarter to account for reporting lags, increased 2.4 percent to $20,901 in the first quarter. Auto loan originations, which TransUnion also views one quarter in arrears, rose 0.9 percent to $6.8 million in the first quarter after six straight year-over-year declines beginning in the third quarter of 2016. The growth was driven by a 3 percent gain year over year in prime plus and superprime originations, Brian Landau, automotive business leader at TransUnion, said in a statement. Subprime originations fell 3.3 percent.

"We expect this shift in origination mix from lower credit tier consumers to higher credit tier consumers to continue through the end of the year as lenders look to reduce portfolio risk," he said. "This will likely result in continued stabilization in the delinquency rate."

 

-Previously printed in Automotive News by Hannah Lutz on August 22,2018. You can reach Hannah Lutz at hlutz@crain.com -- Follow Hannah on Twitter: @hm_lutz