Auto Lending Remains Robust; Defaults Stay Low

U.S. consumers, particularly automotive buyers, are keeping the lending industry busy. And in what’s good news to lenders, they’re paying back their car loans with few exceptions, according to TransUnion’s latest credit activity report.

“The consumer is the star,” says Satyan Merchant, senior vice president and auto line of business leader at credit tracker TransUnion.

Borrowers are “expected to perform well once more in 2020, marking one of the longest periods of sustained positive credit activity in recent decades,” TransUnion says.

It makes the recession of 10 years ago seem like a distant memory.

“We’ve been in a strong economy for more than a decade,” Merchant tells Wards. “Employment numbers are good. And wages are increasing (after a period in which they lagged behind the rising employment rate).” 

Affordability issues persist in the auto industry, which is expected to see about a 2% drop in sales in 2020, he says. “We expect loan originations will be flat next year.”  

Wards Intelligence predicts light-vehicle sales of 17 million units this year. That would mean a five-year streak of annual deliveries totaling 17 million or higher.

The average vehicle transaction price is more than $35,000, according to TrueCar. Increasing vehicle costs are expected to lead to longer loan terms as consumers seek to keep their monthly car payments reasonable, Merchant says, adding the average auto loan currently is 68 to 69 months.

How long is too long for an extended loan term?

“That’s the magical question,” Merchant says. “The answer differs by lender.”

Conventional wisdom is that loans extending beyond 84 months are risky, increasing the likelihood of defaults.

But Merchant says today’s lenders use modern technology to better assess risks, loan to value and dealers’ performance as middlemen in arranging financing for their customers.

Satyan Merchant (002)_1

The vehicle affordability issue is expected to put many consumers in the used-car market, he says, while noting that manufacturer incentives on new vehicles average a hefty $4,000.

A five-year trend shows serious delinquency levels (payments 60 or more days past due) remain low and fairly consistent. In the auto sector, those levels in recent times have ranged from 1.43% to 1.47%. (Satyan Merchant, left)

Near-prime and subprime lending is expected to account for 34% of auto loans in 2020 compared with 41% at the start of the recession in 2007, TransUnion says.

Deadbeats are relatively rare in auto retailing.

“The auto loan is the first things consumers will pay because their vehicle is the lifeblood of their economy,” Merchant says. “Consumers are well aware of that.”

Most of them also know vehicle repossessions are executed much quicker that house foreclosures.

“The growth pattern of new-auto sales will remain concentrated toward prime-and-above consumers,” he says.

He adds: “External pressures such as higher gas prices and the looming threat of auto tariffs, combined with rising vehicle prices, are all contributing to the concern of auto affordability.

“Despite these headwinds, loan performance in the auto industry remains strong.”