Automotive sales will pick up in 2021, credit bureau TransUnion predicts, though primarily for customers with prime and above credit. As the U.S. economy continues to muscle through the deadly coronavirus pandemic, nonprime customers will steadily vanish from the market.
This slowdown in nonprime originations isn’t likely to stem from auto lenders tightening their underwriting practices, said Satyan Merchant, senior vice president and automotive business leader at TransUnion. Rather, a slowdown in demand from consumers in these credit tiers will curtail purchases in the new year.
Subprime automotive balances reached historic lows in the spring as the economy buckled under shelter-in-place orders and unemployment rates not seen since the 1930s. Strong consumer demand and aggressive automaker incentives drove sales and profits in the second half of the year, though consumers in the lower credit tiers were largely left out of the recovery.
Merchant said he is cautiously optimistic for next year, largely because of the rapid shifts the industry demonstrated over the past few months, such as digital retailing and auto lenders tapping more comprehensive consumer data sources. Still, a rough road lies ahead.
“No one feels like we’re out of the woods,” Merchant told Automotive News. “Consumers still are not fully back on their feet.”
TransUnion predicts origination activity will generate 6.8 million new accounts in the first quarter and 7.4 million in the second quarter, largely from customers with strong credit. Nonprime customer accounts will “gradually decrease” over this time frame and throughout the year.
These predictions don’t include provisions for another round of federal stimulus, or vaccine distribution, Merchant added. If supply constraints lessen and auto accommodations continue to decline, the health of the industry will continually improve, he said.
“Strong action and cooperation in the industry helped us to rebound faster than anyone expected,” Merchant said. “There could be room for pent-up demand for the higher-risk tier of consumer, but that’s hard to predict.”