Well, It's Better than Horrible

Considering the current economy, it's surprising so many consumers are keeping up with their car-loan payments, says Dann Adams, president of Equifax Inc.'s U.S. Consumer Information Solutions.

It could be worse in the face of a recession and high unemployment, he says.

Of 221 million consumers his firm tracks, 71% have not had a late payment in 12 months, even though the U.S. unemployment rate is 9.1% compared with 3.6% in 2000.

“You wouldn't think that many consumers would be in that good of shape,” Adams says at a recent Consumer Bankers Assn. auto finance conference. “It's staggering.”

Still, auto-loan delinquencies are up, with banks taking the hardest hits among lending institutions, says Melinda Zabritski, director-automotive credit for Experian Automotive.

Thirty-day delinquencies hit 2.50% in the year's first quarter compared with like-2008, an 11.3% increase, according to Experian data tracking.

Banks saw the highest increase, 33.5%, of such delinquencies. That compares with 2% for auto makers' captive finance firms, 17.1% for credit unions and 0.6% for finance companies.

“Banks' delinquency rates are increasing at an alarming rate,” Zabritski tells Ward's. “A 33.5% increase in one year definitely is not a good thing.”

It's a consequence of many banks becoming more aggressive, straying from their core businesses and delving deeper into subprime lending a couple of years ago.

“They went somewhat deeper than they should have,” Zabritski says. “But some banks are doing quite well.”

Code-red 60-day delinquencies rose overall to 0.82% in the first quarter of 2009, a 19.5% increase compared with year-ago. Credit unions show the highest rate of increase (36.9%) but the lowest percentage of such delinquent loans (0.45%) among lenders.

Finance companies suffered the highest 60-day delinquency rate of 1.96% for their loans, a 12.4% increase from first-quarter 2008.

The captives had the lowest increase at 7.5%, “meaning they're doing a good job of managing the delinquency at the earlier 30-day point,” Zabritski says. “When a car loan reaches a 60-day delinquency, it's pretty much gone at that point.”

To mitigate vehicle repossessions — a lose-lose for lender and borrower alike — creditors are reconfiguring payments and terms for some at-risk loans. That increases the likelihood of a payback.

“We're seeing more loan modifications,” Zabritski says.

Although a large part of the U.S. borrowing population “is in very good shape, it does vary geographically,” Adams says. “Subprime has become higher in some troubled states, such as California.

“But it's a case of a few people causing the most damage, because people who are in trouble are in trouble across the line. The largest delinquency rates are among consumers with two or more mortgages.”

Such hard-core borrowers are more likely to become delinquent on their house payments than their car loans, although some are capable of doing both. “But the last line of defense is that you've got to have that car,” Adams says.

To reduce the risk of a car loan turning ugly, lenders, unlike before, are requiring sizeable down payments and insisting on shorter terms. They also want higher credit scores of prospective borrowers.

But those scores alone aren't enough to determine payback probability, Adams says. “Credit scores don't give the full picture. Scores should be calibrated to account for people in troubled states such as California, Nevada, Florida and Michigan.

“And income matters. It and employment are being brought back into the credit equation,” he says. “When you can verify income, it makes a world of difference. Employment is a driving factor of consumer-credit quality.”

It's pretty basic, says Scott Hoyt, senior director-consumer economics for Moody's Economy.com. “People with jobs can make car payments. People without jobs can't.”

He predicts delinquencies will peak next year and start falling in 2011.

Lenders are paying special attention to debt-to-income ratios in deciding whether to approve a loan. “It's not about mortgage-to-income, it's about total debt-to-income,” Adams says.

Ways in which financing of new and used cars has changed from pre-recession 2008 to now, according to Experian data, include:

Despite stricter lending standards and a reduction of prime customers, financing now is available over a wide range of loans, including deep subprime, subprime and nonprime that, combined, make up 41.5% of the market, Zabritski says.

The greater availability of subprime loans today is in contrast to the fourth quarter of 2008 when many lenders “knee-jerked” and abruptly stopped lending to people with credit issues, she says. “That quarter needs an asterisk. Funds dried up. What funds were available, everyone wanted for prime.”

Lenders are easing up, she says. “Now if we can just get people buying cars again.”

Adams agrees. “It's not so much that banks aren't lending, rather it's that so many consumers aren't applying for loans,” he says, citing a decline of active auto loans from 87 million last year to 85 million now.

Lenders also are working at mending relations with franchised auto dealers who were dismayed during the credit freeze when many of their customers interested in buying vehicles ran into financing difficulties.

Those often led to no sales or down-sized sales or even losing customers to independent used-car dealers with “buy-here, pay-here” operations.

Although the credit crisis is abating, it has sparked a power shift, Zabritski says.

In the days of easy credit, “dealers and customers were controlling the financing. Lenders had to come up with programs to suit them.”

But no more.

“Lenders are now saying, ‘Here are the lending products; if the consumer can't fit into one of them, then we can't help you.’ That is a big change from 18 months ago,” she says.