Q&A

Subprime, delinquencies, loan terms will grow, Experian says

Experian's Melinda Zabritski: A majority of vehicles are still being financed in a prime environment.
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Subprime financing -- and delinquencies -- are likely to grow in 2014, says Melinda Zabritski, senior director of automotive credit for Experian Automotive.

Vehicle loan terms, which hit an average of 65 months for new cars during the first 10 months of 2013, also will continue to stretch out.

Zabritski spoke with Automotive News Staff Reporter Amy Wilson.

Subprime lending has come back in a big way. Where is it compared with the availability before the crash?

When you look at subprime as a percentage of the industry, it had started to taper down slightly even before the recession. Going into 2007 and the early part of 2008, you started to see some slight reduction in subprime already before the third quarter 2008 hit. So there was already a little bit of adjustment being made beforehand. It's an area where we certainly have much greater availability of funds. It's certainly an area where you see more lenders move into.

Will it continue to grow?

I think so. It will depend on what happens with delinquencies, where do we start seeing payments, what's happening in the wholesale markets, when do we start to see some of the drops there as well.

What's your outlook on delinquencies?

We try not to forecast, but here's the thing: We've been growing subprime. This is where delinquencies do occur. As subprime financing continues to represent a greater percentage of financing, we should actually begin to see some increases in delinquencies. However, we still have the majority of vehicles being financed in a prime environment. Those customers tend not to go delinquent. But I think we'll start to see some modest increases in delinquencies probably this year.

Are loan terms stretching out faster than you expected, or are terms getting longer than you expected?

We are growing those even longer-term loans -- 72 [months] has become the most common term. I talk to a lot of lenders and ask, "Are you stopping here, or are you exploring other areas?" A lot will depend on the increased competition in the marketplace and what we see from a compliance standpoint. If you start to have compliance impacting rates and maybe you have other lenders who maybe are not held to the same compliance standards, if they continue to extend rate, everyone is going to have to follow to remain competitive and keep share. So I think there are a lot of things occurring that all come together around term. But I think we'll continue to see those terms grow.

Are you surprised 72 is the new normal?

Not necessarily, when you consider that consumers are monthly payment buyers. They tend to negotiate monthly payment and you get comfortable with a particular payment, so how do you keep that payment flat. Term is certainly one thing. Sure, you want to have the lowest term, the lowest rate, etc., etc., to have the lowest totality of payments. But you know your average consumer is looking at it and saying, "Hey, if I can save $25 or $30 a month for a longer term, I'm always going to have a car payment," it makes a lot of financial sense when you're just looking at your monthly debt obligation.

Will we continue to see the average loan term, now 65 months on new cars, creep up?

As we shift more into 72, we're going to see that average steadily uptick. That's the trend line we've been going on for the last four to five years.

Where might it stabilize?

I wouldn't hazard a guess. Sometimes the creep is subtle.

What's the longest you see?

You will see over 100 [months]. They're very few and far between however.

You can reach Amy Wilson at awilson@crain.com.

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