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The 60-day auto loan delinquency rate is projected to reach 1.4 percent at the end of 2017, TransUnion says. Photo credit: BLOOMBERG
Auto loan delinquency rates will jump in 2017 as a result of higher interest rates and more subprime borrowers, TransUnion predicts. However, the rise is a natural effect of more subprime lending and is not a cause for concern, the company said.
The 60-day delinquency rate is projected to reach 1.4 percent at the end of 2017, the highest level since a 1.59 percent rate at the end of 2009, during the recession. The rate will reach 1.36 percent in the fourth quarter of 2016, TransUnion forecasts, up from 1.27 percent a year earlier.
Lenders have deliberately accepted more risk from nonprime loans, Jason Laky, senior vice president and automotive and consumer lending business leader at TransUnion, said in a statement. “An increase in delinquency is the natural consequence of that strategy. If lenders are compensated for the additional risk in the portfolio, a modest increase in delinquency should not disrupt the auto finance market. We do not expect to see a surge in auto delinquency unless there is an economic shock.”
If the delinquency rate inches closer to 2009’s 1.59 percent, there could be cause for concern, Laky said, but for now he’s unfazed.
Consumers pay their auto loans before any other loan obligation, Laky said. They need cars to get to and from their jobs and to manage other parts of their lives, he said.
“For people that are concerned about a bubble, there’s no systemwide financial risk associated with subprime auto lending and creating a bubble,” he told Automotive News.
In the third quarter, the auto loans outstanding totaled $1.1 trillion. Of that, $172 billion was subprime, just 16 percent of the industry, Laky said.
“$172 billion of subprime auto loans is not a terrible risk to the financial system,” he said. “It’s a pretty liquid market. If a lender has to repossess a car, they can do it and remarket it pretty quickly.”
Photo credit: TransUnion
Individual lenders could be at risk, however, if they extend too far into subprime without proper underwriting standards, he said.
In 2017, Laky said, subprime share could grow as more buyers choose used vehicles over new. Subprime borrowers tend to buy used vehicles more than they do new. Some superprime borrowers may also choose to pay cash as interest rates tick up, further adjusting the auto finance share toward subprime, he added.
If new-vehicle sales grow at a slower rate than in recent years, TransUnion expects the growth rate of auto loan debt per borrower to slow on average as well. The average debt is projected to grow at a 2.4 percent rate between the end of 2015 and the end of 2016, compared with the 3.1 percent growth rate between year-end 2014 and year-end 2015 and 4 percent increase between year-end 2013 and year-end 2014. TransUnion forecasts that the average auto loan debt per borrower will reach $18,435 in the fourth quarter of 2016 and $18,840 in the fourth quarter of 2017.
Auto delinquencies predicted to rise
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