Despite a drop in the average amount financed, monthly payments for car loans are trending higher.
5/15/2022 3:00 P.M.
3 minute read
Auto loan origination volumes are low due to limited supply and pricing constraints, according to Satyan Merchant, senior vice president and auto business leader at TransUnion. Here, he shares his outlook on other auto loan trends.
Q: Are average monthly payments holding steady or rising?
We looked at vehicle financing data trends in AutoCreditInsight, a solution that TransUnion and S&P Global Mobility partnered on to bring such insights to market. Used vehicle loan payments have stabilized since September 2022. This can be attributed to a decrease in the amount financed for used cars, which has gradually declined since September of last year.
Demand has softened with rising interest rates and thus decreasing prices for used vehicles.
For new vehicle loans, there have been periods of stabilization over the last couple of years but the overall trend of increased monthly payments continues. In December 2022 and January 2023, there was minimal change to the average monthly payment. We will have to wait and see if that continues. The continued increase in monthly payments for new vehicles is a product of interest rate increases as the amount financed for new vehicles has been consistent since summer of 2022.
Q: How did higher interest rates affect auto loan originations?
After years of near 0% interest rates, the Fed increased rates for the first time in March 2022. When we compare Q3 2022 and Q4 2022 originations to the same quarters in 2019, we see declines for both new and used vehicle loans. At the same time, the amount financed for those same quarters from 2019 to 2022 increased. It’s likely that both of those are factors behind the market softening.
Q: Is new vehicle production back to pre-pandemic levels? How does this impact consumer spending on vehicles?
There is evidence that inventory is back to where it was pre-pandemic. That may be more of a product of softening demand than return to normal production. With increased inventory, we are starting to see incentives return from the manufacturers and captives. For the consumer, incentives will bring some of them back into the market. They will trade in older vehicles and increase supply of used vehicles, which should decrease the prices of used vehicles. As all of this works its way through the ecosystem, more consumers should come to the vehicle market.
Q: What are auto delinquency rates like now, and what do you expect to see later in 2023?
From the TransUnion February Credit Industry Snapshot report, “Consumer 30+DPD decreased to 4.55% (12 bps); 60+DPD increased to 2.07% (1 bps).” As the report suggests, if the job market remains strong, the growth in delinquencies can be expected to be minimal. However, Q2 2022 vintage delinquency analysis shows early signs of poor performance in the 60+ DPD when compared to similar cohorts from 2017-2021.
Q: Have originating Loan-to-Value (LTV) ratios reached pre-pandemic levels?
Yes, they have. In fact, Q3 2022 and Q4 2022 LTVs were higher the same quarters in 2019 for both new and used vehicles.
Q: Will the recent bank failings have any impact on auto loan delinquencies/originations?
It is important to note that none of the recent major banks that failed had consumer loan auto portfolios. It is too soon to tell whether there are secondary and tertiary effects in the broader consumer lending market, including auto loans.
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