Auto Lending Practices Impact Delinquencies

Since mid-2013, household debt has been increasing.

Auto lending practices growth has been a major driver of this increase, as auto loan balances have been consistently increasing for several years.

In the third quarter of 2019, the average new account balance was $22,232, up 3.3 percent year over year. Auto originations are also increasing, with a 4.3 percent year-over-year increase of 7.5 million new accounts in the third quarter of 2019. Other motor vehicle lending trends include:

  • Despite stable delinquency rates, the number of subprime car loan originations climbed in 2016.
  • In 2017, auto loans to borrowers with lower credit scores increased at a slower rate than in 2016, yet the volume of loans to subprime borrowers continued to rise.
  • In comparison to 2016, lending to borrowers with higher credit scores is expanding at a similar rate. Subprime loan originations were predicted to rise to 16.5 percent of total car loan originations in 2019, up from 15.1 percent in 2018.
  • Vehicle financing businesses have historically originated and held more than 70% of subprime auto loans.
  • Since 2011, the amount of subprime loans originated by vehicle finance businesses has more than doubled, totaling more than $200 billion.
  • Bank auto loan balances, on the other hand, are primarily made up of loans made to customers with better credit scores.
  • There is approximately $300 billion in outstanding subprime vehicle loan debt (borrowers with credit scores of 620 or lower).
  • Since 2011, the total outstanding subprime auto loan debt has risen rapidly in monetary terms, but it has accounted for around 24% of overall outstanding auto loan amounts. While the total monetary value of vehicle loans continues to rise, the proportion of subprime loans in total auto loan debt has stayed largely stable for several years.

Given that car financing businesses originate the majority of subprime vehicle loans, it’s not surprising that delinquent rates for loans issued by auto finance companies are rising faster than delinquency rates for loans issued by banks, which prefer to lend to borrowers with better credit scores. While bank auto loan delinquencies have been decreasing since the financial crisis, the delinquency rate for auto finance businesses has been continuously climbing since 2014, increasing by more than two percentage points.

Similarly, while delinquent rates for borrowers with credit scores of 660 or higher have remained largely stable, default rates for borrowers with subprime credit scores are rising — particularly among subprime borrowers with vehicle finance company loans. Subprime vehicle loans are held by more than 23 million people.

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