Experian Says Rising Loan Amounts, Rates Hurt Vehicle Sales

Trending increases in loan amounts, monthly payments and interest rates may play roles in why the auto industry is expected to sell fewer vehicles in the U.S. this year, according to Experian’s latest State of the Automotive Finance Market Report.

Average new-vehicle loan amounts and monthly payments recently hit record highs, says the credit-tracking company.  

Findings show the average new-vehicle loan hit $31,455 in the first quarter of 2018, an increase of $921 from the previous year.

The monthly payment for a new vehicle rose to $523, a $15 increase over the same period. The average interest rate for a new vehicle was 5.17% during the quarter.

“The dream of owning a new vehicle is becoming more elusive to the average American,” says Melinda Zabritski, Experian’s senior director-automotive financial solutions.

“To reverse the trend, dealers and lenders need to better understand the data and explore different options to make new-vehicle ownership accessible and appealing,” she says.

The report says new-vehicle loan terms also increased during the quarter (slightly above 69 months). While 72-month loans remain the most common loan term, the number of 85- to 96-month loans have increased. Loans that long create a certain measure of industry angst.

Dealers dislike long auto loans because they tend to take consumers out of the market for too long, reducing buying cycles. Moreover, longer loans are riskier with higher chances for defaults. Dealers deem leasing as an alternative to overly long loan terms.     

The credit-score population segments most impacted by the rising loan trends related to new-vehicle purchases are subprime and deep subprime consumers, Experian says.

The percentage of new-vehicle loans to subprime and deep subprime consumers has decreased 8.4% and 14.1%, respectively. The percentage of new vehicle loans to prime and super prime consumers has reached 73.4%, the highest first-quarter level since 2012. Experian sees that as a sign that some lenders have become more risk-averse.

While some lenders have reduced loans to riskier borrowers, the overall automotive loan market shows signs of performance improvement. The percentage of 30-day delinquencies have dropped 3.1% to 1.90% in the first quarter of this year, while 60-day delinquencies have remained flat at 0.67%.

“Traditionally, lenders’ risk tolerance has swung back and forth like a pendulum, and right now we're seeing a more risk-averse side,” Zabritski says. “But if payments continue to improve, we could see credit standards loosen. The more insight lenders have into consumer credit behavior, the better decisions they can make.”

Additional first-quarter findings from the Experian report include:

·        Outstanding loan balances reached a record high of $1.108 trillion.

·        Credit unions continue to see the highest growth in automotive loan market share, reaching 21.3%, a 6.9% increase from a year ago.

·        The average credit score for a new-vehicle loan rose to 716, while the average credit score for a used-vehicle loan rose to 655.

·        Loans for used vehicles reached $19,536, a new record high.