Next year will be a strong year in auto finance, with auto loan and lease balances rising as delinquencies remain low, TransUnion forecasts.
The average auto loan and lease balance will reach $18,509 during the fourth quarter of next year, up slightly from a projected $17,985 in the fourth quarter of 2015, TransUnion predicts.
Of that balance, auto loan debt per borrower in the fourth quarter of next year will rise by more than $3,500 from the fourth quarter of 2009, when the average balance was $14,956, TransUnion said.
There is a “healthy equilibrium between growing balances and low delinquency rates” as the economy stabilizes and job growth is steady, Jason Laky, senior vice president and automotive business leader for TransUnion, said in a statement.
Consumers feel confident enough to take on auto loans, and lenders can offer large loans without putting their portfolios at risk, he said.
“As long as the economy is expanding and auto sales are going up, auto balances are going to increase,” Laky told Automotive News.
There are more consumers taking out new loans than there are consumers retiring old loans, he said. And with interest rates low, more consumers are choosing to finance their purchases than to pay cash.
“Coming out of the recession, more lenders are getting back into lending and have slowly expanded underwriting criteria to provide loans to more people,” Laky said.
While more consumers are taking out loans, they are taking them out for longer periods of time to keep payments low, which can be an effective strategy, depending on the consumers’ intention, Laky said.
They are “a good thing if the lender is able to help the consumer match the duration of the loan to the time they want to own and use the vehicle,” Laky said. But “if it’s a mechanism just to get a lower payment,” he added, “it’s going to take longer to get to positive equity.”
Lenders should keep an eye on loan term extension, but in some cases, it can be a “valuable tool to get consumers into the cars they want,” Laky said.
Although outstanding balances will rise, delinquency rates should hold steady, Laky said.
TransUnion projects that the 60-day delinquency rate will be 1.11 percent in the fourth quarter of both 2015 and 2016. That’s down from 1.16 percent in 2014.
“We believe we have reached a ‘new normal’ in auto delinquency and see no immediate cause for concern,” Laky said in the statement.
Overall, he said, delinquencies should remain steady, “but at the same time, we’re seeing continued expansion into nonprime and subprime to bring more borrowers into lending spectrum without adding risk,” he told Automotive News.
Fewer subprime borrowers
Despite the notion of a subprime bubble, fewer subprime borrowers had an auto loan in the third quarter of 2015 than in 2009, TransUnion said.
In the third quarter, 18.7 percent of auto loans, or 13.9 million borrowers, were subprime. That’s well below the 23.7 percent, or 14.8 million consumers, in the third quarter of 2009.
“While auto lenders are certainly extending loans and leases to consumers who present a higher risk, these consumers have been able to manage their auto loan obligations in line with expectations,” Laky said in the statement.
“As auto lenders incorporate trended data into their analyses, we may see even more consumers receiving auto loans as lenders more effectively underwrite previously unscorable consumers.”