Living in Southern California, I don’t get to experience the four seasons like people in many other parts of the country. However, I recently visited some of my co-workers in Chicago and couldn’t help but notice the smiles on their faces and pep in their steps.
It was spring, after all! Shoppers were heading up and down Michigan Avenue, the snow was gone, temperatures were rising and summer was right around the corner. The sense of enthusiasm and reinvigoration was palpable.
It’s also a perfect metaphor for what’s happening in the automotive credit market. Let’s face it — a couple years ago, credit was frozen like a Minnesota lake in February, and most lenders and retailers must have felt like they were walking uphill both ways in a 2-foot snowdrift.
However, when we look at the data from Q4 2011, there are clear signs that the automotive credit market continues its thaw, giving everyone in the industry a sense of renewed optimism. Consumers are doing a better job of repaying loans, lenders have much less money at risk, loans are easier to obtain, interest rates are dropping, and lenders are coming up with programs to stretch loans and make monthly payments more affordable.
All these factors are good news for everyone involved, including consumers, retailers and lenders. Here are some of the numbers behind these positive trends:
- First, automotive loan delinquencies continue to decline. The 30-day delinquency rate fell 6.57 % from Q4 2010 to Q4 2011 (2.98 % to 2.79 %). The 60-day delinquency rate fell 9.51 % from 0.79 % in Q4 2010 to 0.72 % in Q4 2011.
- The overall dollar volume of loans at risk dropped to $18.5 billion, a $1.8 billion drop from Q4 2010. Meanwhile, the total volume of open loans rose by $23.9 billion in Q4 2011 to $658 billion.
These signs provide particularly good news for lenders. With less money at risk, lenders are on much more solid ground. This gives them more room to approve loans for customers with lower credit scores. Ultimately, this is good for automotive retailers, as it opens the door to more potential customers.
How did the additional appetite for risk play out in terms of numbers in Q4 2011?
- Average credit scores for new vehicle loans dropped six points from 767 in Q4 2010 to 761 in Q4 2011.
- Average credit scores for used vehicle loans dropped nine points from 679 in Q4 2010 to 670 in Q4 2011.
- New vehicle loans to nonprime, subprime and deep subprime customers increased by 13.8 % from Q4 2010 to Q4 2011.
From a consumer standpoint, perhaps the most important sign during Q4 2011 was the drop in interest rates. Average interest rates for new vehicle loans fell to 4.52 % in Q4 2011, down from 4.84 % in Q4 2010. Average rates for used vehicle loans fell to 8.68 % in Q4 2011, down from 8.71 % in Q4 2010. The Q4 2011 rates were the lowest since Q1 2008.
In addition, lenders appeared to be looking for ways to get consumers into vehicles with lower monthly payments. The number of loans from 73 to 84 months long increased by 47.4 % from Q4 2010 to Q4 2011 and accounted for 14.1 % of all loans. Between the lower interest rates and longer terms, consumers are much more able to find monthly payments that fit their budgets.
The improved automotive lending market is good news for consumers in the market to buy a new or used vehicle. The confluence of low interest rates, longer loan terms and an increase in loans outside of prime provide a great opportunity for more people to find a vehicle that suits their needs.
While the industry has not recovered to the point where we are seeing red-hot sales numbers, the current thaw is welcome relief to everyone who has been battered by the cold of the past few years. And, like my co-workers in Chicago, the improved forecast is putting smiles on faces. Hopefully, the trend will continue and the industry will see sunny days ahead.