Competition forces auto lenders to lengthen terms, reduce rates
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Interest rates on auto loans are down, and lenders are accepting more risk as competition heats up in auto finance. |
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LAS VEGAS -- Auto lenders are accepting more risk as competition heats up in auto finance.
That makes loans cheaper, which bodes well for dealers. But it makes lenders nervous that delinquencies and losses will pick up from near-historic lows, prompting the pendulum eventually to swing back.
Here are some indicators of the trend from Melinda Zabritski, director of automotive credit for Experian Automotive. She made a presentation at the Vehicle Finance Conference held here this month by the American Financial Services Association.
• Subprime and nonprime auto loans are picking up, especially among big banks. So-called super-prime loans, those to the most creditworthy consumers, have fallen as a percent of total loans.
"This is mostly being driven by the bank population," Zabritski said. "I've been in meetings where the banks sort of look around at each other and say, 'That's not us; that's not where it's occurring.' But it is primarily the bank population. That's really where the growth is."
| Risk category | Credit score range* | % change, Sept-Nov. 2011 vs. yr.-ago |
| Prime: | ||
| Super Prime | 740+ | -7.1% |
| Prime | 680-739 | +1.6% |
| Subprime: | ||
| Nonprime | 620-679 | +10.5% |
| Subprime | 550-619 | +13.5% |
| Deep Subprime | below 550 | +1.4% |
| * -- Scorex Plus scale | ||
| Source: Experian Automotive | ||
• Lenders are approving extraordinarily long terms to create lower monthly payments.
In the past, that has generated unhappy customers in the long run because when they want to buy another car, they are almost always upside down on their trade-in, owing more on their car than it's worth.
"We are certainly expanding in very-long-term loans," Zabritski said, "and we're writing longer-term loans for higher-risk customers, since those are the ones who need the longer terms to obtain a monthly payment they can afford."
| Terms (months) | Sept-Nov. 2011 | Sept-Nov. 2010 | % change |
| 37-48 | 9.6% | 9.6%* | 0.4% |
| 49-60 | 32.3% | 36.2% | -10.6% |
| 61-72 | 38.3% | 37.8% | 1.2% |
| 73-84 | 11.1% | 7.7% | 44.7% |
| * -- Loan term appears unchanged due to rounding. Source: Experian Automotive | |||
• Interest rates on auto loans are down, while loan-to-value ratios generally are up. For now, the deepest subprime loans with the longest terms are an exception.
"Deep subprime LTVs are still down some. If it's all about competition and it's all about market share, will those LTVs start to change? It's possible," Zabritski said. Citing the 6.5 percent rate for subprime customers on long-term loans, she said: "That's a ginormous downturn in that rate."
| Avg. rate, 73-84 mos. | Sept.-Nov. 2011 | Sept.-Nov. 2010 | % change |
| PRIME | 3.2% | 5.3% | -39.4% |
| SUBPRIME | 6.5% | 11.1% | -41.1% |
| Source: Experian Automotive | |||
You can reach Jim Henry at autonews@crain.com.
