Auto loan market viewed as healthy despite delinquency creep
Experian says there are plenty of signs that the U.S. auto loan market is still healthy: Repossessions remain low and delinquencies of 30-plus days were lower in the fourth quarter of 2012 than in the final quarter of 2011.
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While the number of auto loans past due two months or more has edged up for the first time in three years, the market overall is still healthy, Experian Automotive's Melinda Zabritski says.
Experian reported last week that auto loans delinquent 60 days or more -- those likely to be written off as bad loans -- accounted for 0.74 percent of the total in the fourth quarter of 2012, an increase of 2 basis points from 0.72 percent in the fourth quarter of 2011.
Auto loan delinquencies "are up slightly, but it really is a small increase," said Melinda Zabritski, director of automotive credit for Experian.
Sixty-day delinquencies hadn't increased year over year since the fourth quarter of 2009, Experian said.
If sustained, higher delinquencies eventually could motivate lenders to tighten approval standards, but analysts don't expect that any time soon. If anything, tougher competition is pressuring lenders to keep standards relaxed.
Zabritski said there are plenty of indications that the auto loan market is still healthy overall. Repossessions remained down in the fourth quarter, and delinquencies of 30-plus days were still lower than in the 2011 quarter, she said.
In addition, she said, 60-day delinquencies were still a lot lower than they were at the most recent peak of 0.94 percent of outstanding loans in the fourth quarter of 2009.
"They're definitely lower than they were during the recession," Zabritski said.
Delinquencies started falling in 2009 because lenders tightened approval standards even earlier, especially for subprime customers.
Consumer behavior also contributed to the drop in delinquencies. Analysts said that in the last recession many borrowers put a higher priority on making their car payments, so they could get to work, than on making their mortgage payments. In previous recessions, mortgage payments were the No. 1 priority.
Meanwhile, as the economy slowly recovered, some auto lenders gradually began to relax standards again, and some new, independent subprime lenders entered the field. According to Experian, subprime auto loans gained share in the third quarter of 2010, for the first time since 2007. So it was almost inevitable that delinquencies would eventually increase, as subprime borrowers accounted for a greater share of loans.
In 2012, Zabritski and other analysts said they were somewhat surprised that delinquencies stayed as low as they did for as long as they did. Contributing factors included restraint among auto lenders in relaxing approvals and high used-car values, which sometimes allowed borrowers to sell their vehicles and come out ahead.
It also helps that the economy is improving and auto sales overall are expanding. As the economy improves, that makes delinquencies less likely in the first place. Math also helps. In a downturn, delinquencies as a percent of the total are magnified because there's a higher number of delinquencies divided by a lower number of loans. In an upturn, the opposite is true.
"Of course, you never want to see an increase in delinquencies," Zabritski said. "But when you take a step back and look at the market compared to where it was three years ago, we still have remarkable stability."
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