Credit mix in auto lending remains stable, Equifax says

http://www.autonews.com/apps/pbcsi.dll/storyimage/CA/20160622/FINANCE_AND_INSURANCE/160629944/AR/0/AR-160629944.jpg

The auto loan credit mix has remained steady over the past four years, lending stability to the market, Equifax says.

The main trend in auto finance over the past four years? Stability, says Equifax’s auto finance leader Lou Loquasto.

“The most predictive metric to track when trying to decide how well the performance of auto is [doing] is credit mix,” Loquasto said. “You just look at credit mix and, say, if a significant amount of credit mix is shifted, losses could be higher.”

Over the past four years, the auto loan credit mix has remained steady.

Accounts with credit scores below 620 have made up between 20.7 and 21.5 percent of the credit mix for the month of January in 2013 through 2016. Accounts with scores of 620 to 699 made up between 26.1 and 26.8 percent, those with scores of 700 to 779 made up 27.2 percent to 28.0 percent, and accounts with scores of 780 and above made up 22.2 to 22.3 percent of the credit mix for the past four Januarys.

That consistency is positive for the market. In particular, Loquasto said, auto lenders issuing loans to subprime borrowers with scores below 620 “have done a great job making those payments stay affordable.”

Most subprime borrowers pay their loans on time, but the industry only talks about those that end up producing losses, said Loquasto. “The best way for a 550 to become a 660 is to have an auto loan.”

With consistency in credit mix, losses will stand where they have for the past few years, he said.

Despite industry chatter around increased subprime lending, auto lenders have kept the mix stable. With regard to volume, there was some growth in the past two years. This year, so far, there’s been a slight decline. The number of new subprime accounts grew 3 percent in the first three months of 2014 and 16 percent during the same period in 2015 before falling 1 percent, to 432,000 new subprime accounts, in the first quarter of 2016.

The decrease in 2016 stems from new players coming to the market in 2015.

“You see a little bit of that in the performance,” Loquasto said. “Pricing is so competitive right now.”

Lenders’ profitability has been squeezed as they compete to win customers. Now some lenders are pulling back, but it’s a sign of a move toward normal levels of profitability in 2016, he said.

“When there’s such a competitive rush to buy this business, pricing suffers,” he said. “The pullback in 2016 is a result of higher competition and price compression.”

Source link

Credit mix in auto lending remains stable, Equifax says