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What bubble? Subprime vehicle loans hit Q1 10-year low; 30-day delinquencies drop

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When discussing automotive lending, it seems like one term is on everyone’s lips: “subprime auto loan bubble.” There’s always someone who claims that the bubble is bursting. But a level-headed look at the data shows otherwise.

According to our Q1 2017 State of the Automotive Finance Market report, 30-day delinquencies dropped and subprime auto lending reached a 10-year record low for Q1. The 30-day delinquency rate dropped from 2.1 percent in Q1 2016 to 1.96 percent in Q1 2017, while the total share of subprime and deep-subprime loans dropped from 26.48 percent in Q1 2016 to 24.1 percent in Q1 2017.

The truth is, lenders are making rational decisions based on shifts in the market. When delinquencies started to go up, the lending industry shifted to more creditworthy customers. This is borne out in the rise in customers’ average credit scores for both new and used vehicle loans:

  • The average customer credit score for a new vehicle loan rose from 712 in Q1 2016 to 717 in Q1 2017.
  • The average customer credit score for a used vehicle loan rose from 645 in Q1 2016 to 652 in Q1 2017.

In a clear indication that lenders have shifted focus to more creditworthy customers, super prime was the only risk tier to grow for new vehicle loans from Q1 2016 to Q1 2017. Super-prime share moved from 27.4 percent in Q1 2016 to 29.12 percent in Q1 2017. All other risk tiers lost share in the new vehicle loan category:

  • Prime — 43.36 percent, Q1 2016 to 43.04 percent, Q1 2017.
  • Nonprime — 17.83 percent, Q1 2016 to 16.96 percent in Q1 2017.
  • Subprime — 10.64 percent, Q1 2016 to 10.1 percent in Q1 2017.

For used vehicle loans, there was a similar upward shift in creditworthiness. Prime and super-prime risk tiers combined for 47.4 percent market share in Q1 2017, up from 43.99 percent in Q1 2017. At the low end of the credit spectrum, subprime and deep-subprime share fell from 34.31 percent in Q1 2016 to 31.27 percent in Q1 2017.

The upward shift in used vehicle loan creditworthiness is likely caused by an ample supply of late model used vehicles. Leasing has been on the rise for the past several years (and is at 31.06 percent of all new vehicle financing today). Many of these leased vehicles have come back to the market as low-mileage used vehicles, perfect for CPO programs.

Another key indicator of the lease-to-CPO impact is the rise in used vehicle loan share for captives. In Q1 2017, captives had 8.3 percent used vehicle loan share, compared with 7.2 percent in Q1 2016.

In other findings:

  • Captives continued to dominate new vehicle loan share, moving from 49.4 percent in Q1 2016 to 53.9 percent in Q1 2017.
  • 60-day delinquencies showed a slight rise, going from 0.61 percent in Q1 2016 to 0.67 percent in Q1 2017.
  • The average new vehicle loan reached a record high: $30,534.
  • The average monthly payment for a new vehicle loan reached a record high: $509.

For more information regarding Experian’s insights into the automotive marketplace, visit http://www.experian.com/automotive.