If Auto Sales Drop, More Lenders May Look to Subprime

Auto lending could get more competitive with an expected ebbing of new-vehicle sales this year.

That’s because lenders would vie for pieces of a smaller pie. Historically, drops in vehicle deliveries heighten lenders’ efforts to land borrowers, often ones they weren’t particularly interested in before sales softened.

Various forecasts expect new-vehicle sales this year will fall below 17 million units for the first time since 2014.

Satyan Merchant (002)_0

The answer often is to “buy deeper,” an industry term for taking on more non-prime and subprime customers.

The auto-lending industry has fluctuated in recent times as to taking on those higher-risk borrowers.

A few years ago, some relatively conservative lenders dipped into subprime to increase their business but many of them gradually pulled back, leaving that segment more open to companies that specialize in it.

“Looking into 2020, will new-vehicle sales go flat and then will lenders look to subprime for growth?” Merchant asks. “Or will they use data tools better to assess risk?” Or both?

Auto lending has grown in recent years, but lately at a slower pace. It grew 3.5% in 2019’s third quarter compared with 5.2% at the same time last year, according to TransUnion’ quarterly Industry Insights Report.

Total loan originations remained flat at about 7.3 million in this year’s third quarter, with growth limited to the most creditworthy sectors. In contrast, subprime lending has been down.

Merchant tells Wards the increase in high prime and decrease in subprime has less to do with overall improvements in consumers’ credit scores, and more to do with lenders being pickier about to whom they lend money for vehicle purchases.

This year’s third quarter saw outstanding new- and used-auto loans totaling 83.4 million and accounting for about $1.27 trillion in total outstanding debt.

The quarter’s average loan balance is $21,953, up about $1,000 from the same time last year, according to TransUnion.

The rate of loan delinquencies of 60 days or more was 1.40% in third-quarter 2019, a small uptick from same-time 2018. Merchant calls it “stable.”

Aside from falling sales and rising new-car prices creating affordability issues, the auto industry (and the companion automotive-lending sector) are in pretty good shape, he says.

“There are no red flags, no going down the fire-station pole,” Merchant says. “There’s nothing telling us dire circumstances lie ahead.”