Experian: Subprime originations subside in Q3 vehicle transactions

Drivers with sturdy credit scores were accounting for a greater share of vehicle purchases and leases in the third quarter of 2017, according to the credit bureau Experian. The report also showed that longer loan terms and a shift of buyers with high credit scores toward the used market is continuing as drivers look for affordable options for their next vehicle.

A total of 40.9 percent of loans and leases started between July and September went to prime customers, or those with credit scores between 661 and 780. This share was up from 40.38 percent in the third quarter of 2016. A total of 20.16 percent of loans and leases were started by super prime customers with credit scores of 781 to 850; this share was up from 19.42 percent in the previous year.

Subprime and deep subprime buyers and lessees, whose credit scores are 600 or lower, made up 19.39 percent of the quarter's transactions. This was down from 20.39 percent in the third quarter of 2016 to reach its lowest share since 2012.

Average credit scores among buyers continued to improve from the previous year, from 714 to 716 among new vehicle buyers and 655 to 659 among used vehicle buyers. New vehicle lessees had an average credit score of 722, up four points from the previous year.

Melinda Zabritski, senior director of automotive finance for Experian, says that there has been some concern of an automotive finance bubble due to an increase in subprime lending. However, she says this trend is part of the overall growth of the auto financing market.

"The market turning more prime is an encouraging trend," says Zabritksi. "It indicates that industry professionals are using data and analytics as part of the lending process, and consumers are taking a more active role in managing their credit before buying a car."

Prime and super prime buyers made up 71.93 percent of loans for new vehicle purchases, up from 71.35 percent in the previous year. The share of nonprime buyers—those with credit scores between 601 and 660—shrank from 17.42 percent to 17.33 percent. Subprime buyers, whose credit scores fall between 501 and 600, made up 9.99 percent of new vehicle purchases in the quarter – down from 10.44 percent in the third quarter of 2016.

In the used vehicle purchase market, the share of prime and super prime buyers increased from 48 percent to 49.83 percent. The share of nonprime buyers fell from 22.28 percent to 22.05 percent, while subprime and deep subprime buyers made up 28.12 percent – down from 29.72 percent in the previous year.

Leasing was slightly less prevalent in the third quarter of 2017. While this option accounted for 29.49 percent of new vehicle transactions in the third quarter of 2016, the share was down to 29.14 percent in the most recent quarter.

Prime and super prime customers made up 77.51 percent of new vehicle leases, up from 75.84 percent in the previous year. The share of prime lessees fell from 16.6 percent to 15.73 percent, while the share of subprime lessees dropped from 7.03 percent to 6.34 percent.

The total open automotive loan balance in the third quarter of 2017 stood at $1.12 trillion, up from $1.06 trillion in the third quarter of 2016 and $968 billion in the third quarter of 2015. A total of 61.34 percent of open loan balances were held by prime or super prime borrowers, up from 61.1 percent in the third quarter of 2016. The share of nonprime borrowers shrank from 19.11 percent to 18.72 percent, while subprime and deep subprime borrowers accounted for 19.93 percent of the balance – up from 19.79 percent in the previous year.

The average loan for a new vehicle purchase was $30,329, a year-over-year increase of $291. The typical used vehicle loan stood at $19,291, up $56 from the third quarter of 2016.

New loans had an average term of 69 months, 0.6 months longer than the previous year. New lease terms shortened by 0.29 months to an average of 36.09 months. Used vehicle loan terms held fairly steady, increasing only 0.09 months to 63.95 months.

Nearly three-quarters of new vehicle loans—74.7 percent—had terms longer than 60 months. A total of 59.2 percent of used vehicle loans had terms longer than 60 months.

"It's clear that affordability is a driving force in a consumer's decision to finance a vehicle, and the data shows that consumers are focused on doing what they need to do to reduce monthly payments and obtain the right vehicle that fits their needs, whether it's buying new or used," said Zabritski. "By unlocking the potential of this market data, we can help consumers and the industry achieve more by empowering them to make better decisions."

The average new vehicle loan had a monthly payment of $502, while the average new lease had a monthly payment of $412. Both averages were up by $6 from the previous year.

Used vehicle loans had an average monthly payment of $365. This was up $3 from the previous year.

A total of 2.39 percent of loans and leases were 30 days past due, up from 2.38 percent in the third quarter of 2016. Sixty-day delinquencies made up 0.76 percent of all loans and leases, up from 0.74 percent in the previous year.

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