Financial services research firm Fitch Ratings is sounding the alarm that subprime auto loan delinquencies are tumbling, causing concern for financial analysts.
Delinquencies recently paused after hitting a 20-year high in February of just over 5%; however, Fitch sees this dip as a momentary hiccup. Delinquencies on U.S. subprime auto ABS decreased to 4.15% in March reporting from last month's 20-year high of 5.16%, the company reported in a release. Driving the decline was borrowers taking advantage of tax returns to pay off debts.
Are delinquencies and possible defaults on the rise, creating a Groundhog Day type scenario no one wants to relive? With reputable companies like Moodys and Fitch Ratings drawing attention to this occurrence, it's normal to be concerned, says Christopher Kukla, executive vice president from the Center for Responsible Lending.
However the mortgage and auto loan markets are not the same -- in fact the mortgage market is considerably larger, Kukla adds, reassuringly. So while seeing a rise in auto loan delinquencies, especially with subprime borrowers is unsettling, it is really more the time to hone in on what is occurring in this market and learn from the past.
Kukla says the mortgage and auto loan market are not governed by the same set of loan rules and regulations, and while the home loan market has tightened considerably, auto lending, while regulated, is not under the same level of scrutiny. The bigger issues is the space in lending that has received very little consumer protection attention, he says. Were just seeing the beginning of the Consumer Financial Protection Bureau starting to pay closer attention to a space where you have a few decades of issues that are piling up.
One issue is the vast majority of subprime delinquencies occurring during those first few months of the auto loans life. Using 2014 data, 2.6% of the loans made in the first quarter had missed at least one monthly payment by November, Kukla says. Of the subprime auto loans, which in this data is a score lower than 620, 8.4% of those made up that delinquency figure.
Auto Lending in more of an Ebb and Flow Pattern
While initial concern is worth noting, a number of lenders and credit bureaus note auto loan quality is not crumbling.
Melinda Zabritski, senior director of product and marketing for automotive finance at Experian, says she understands the concern but sees the uptick as more of an ebb and flow situation, rather than a five-alarm fire. We are seeing a bit of an increase in delinquencies but we are looking at auto loan delinquencies across the board and not just subprime, she says.
Zabritski says looking at the bigger market, comparing fourth quarter data from 2007 to fourth quarter in 2015, lenders are actually originating fewer subprime loans and the delinquency rates are lower. Looking at the last five years in delinquencies, it's more of an incremental increase and decrease and not as big if you are examining the total market, she says.
Major players in the auto loan market are also saying they dont see huge increases in delinquencies. For instance, credit unions are notorious for making a vast number of auto loans, with most reporting little to no delinquencies or defaults across the board. Priority Credit Union in Orlando handles a considerable number of auto loans for a variety of members with hardly any payment issues.
The key to reducing delinquencies is how you underwrite and structure the loan from the beginning, explains Scott Baker, Priority's vice president of lending. While credit score is part of the equation, we look at the entire credit file, including payment history with other bills, job security and what could be occurring in the individuals life previously and currently before determining risk.
You can find someone who is delinquent paying medical bills and is struggling to meet those costs but has historically made their car payment, adds Jim Weibert, president of Priority. Those members need their cars and those are the people we want to offer an auto loan.
Baker adds that the credit union approaches the collections process in a swift and direct manner, which seems to stave off mounting delinquencies. Our risk based pricing model and work with indirect lending allows our collections officers to segregate the risker loans and give them immediate attention," he says. "Officers follow a certain protocol to address the delinquency early and ultimately open the dialog to identify a solution.
Ron Montoya, senior consumer advice editor for Edmunds, says from the borrowers perspective, being proactive is key to keeping your payments in check. It is important to start a dialogue with your lender," he says. "Let them know what your situation is and ask what options are available to you. Even a partial payment shows your intent to keep current and is better than no payment at all.
Using recent history as a guide, Montoya says borrowers should take responsibility for knowing what they can handle in terms of loan payments.
Just because you were approved for a $30,000 loan, it doesn't mean you have to buy a $30,000 car, he says. Opting for a $25,000 car, for example, will lower your monthly payment and won't push your budget to the limit.
If your credit is good, try getting pre-approved with a lender you trust like your bank or credit union, Montoya advises. If you have poor credit, you might have to take out a loan with a high interest rate. It doesn't necessarily mean that the company is predatory; it may just meant that they are taking on greater risk. But we still recommend doing some research on these companies by checking their Better Business Bureau ratings and seeking out consumer reviews online.