Rising delinquencies cast shadow over auto lending

Author

Anna del Villar
August 09, 2024

As economic headwinds persist, consumers are becoming more cautious about taking on auto debt.

Driving the news: The latest data from TransUnion shows that auto loan originations took a dip in Q1 to $6 million, down 0.4% year-over-year.

  • Originations were down across all credit tiers except for super prime (credit score: 720+), up 10.3% year-over-year.

  • Originations fell the most in the near prime category (620-659), down 6.4% against last year with the prime segment (660-719) not far behind.

  • 6.1%. Subprime (580-619) originations ticked down by 2.2%.

Why it matters: Most consumers today are more aggressively mitigating their financial risks and it’s reflected in the way they are financing cars. An increased number of buyers are paying cash to circumvent interest rates. But, for consumers not able to do that, a slowing economy, rising unemployment, and higher borrowing costs are crunching wallets, resulting in a growing number of missed loan payments.

Key quote: “Subprime continued to see the most significant challenges, likely due to affordability concerns, with originations down 27.4% from Q1 2019 levels,” said Satyan Merchant, senior vice president of automotive and mortgage at TransUnion.

“Higher delinquencies are worth watching, and they are impacting loan availability at this time. Potential for rate declines, coupled with more normal inventory levels and reduced prices could provide relief to consumers in this market.”

By the numbers: According to the New York Fed, around 8% of auto loan balances were newly delinquent (30 days late) in the second quarter.

  • 60+ day delinquencies in the subprime cohort increased 30 basis points year-over-year to 4.91%, reported Morgan Stanley.

  • Prime 60+ day delinquencies have stayed relatively flat coming in at 0.49%

  • Subprime loss severities (the portion of auto-backed bonds, including unpaid interest and ancillary income that an investor loses in the event of default) increased from 57.5% in June to 60.0% in July.

What it means: With the labor market starting to bend, auto lending will likely continue to see higher delinquency rates, especially in the subprime segment. Loss severity rates continuing to trend higher is troublesome for auto-backed Investors and is forcing lenders to tighten.

Bright spots: Used car prices have come down meaningfully, and new vehicle prices have started to fall as incentives creep back into the market.

  • The average monthly payment fell 0.4% year-over-year to $740 for a new vehicle and dropped 1.5% to $527 for a used one.

  • Leasing is a huge contributing factor to the decline in average monthly payments. Leasing penetration is around 25% of overall purchases and even higher at 48% for EVs.

What we’re watching: Recent disappointing economic data has raised worries that the Fed may have missed a chance to cut interest rates at its last meeting. Yet, Chairman Jerome Powell hinted that an interest rate cut could happen as early as September and possibly give a boost to auto loan originations.

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