July 29, 2021

Subprime auto buyers pummeled by pandemic

The effects of the pandemic continue to pummel subprime automotive consumers, who have the lowest origination levels and highest delinquency rates, credit bureau TransUnion and the Federal Reserve Bank of New York said in separate reports last week.

Auto loan delinquencies crept up in the fourth quarter, driven by subprime customers struggling to pay back their loans. As more subprime customers exit forbearance programs, that figure is likely to climb, TransUnion said.

Weak demand may be a stronger factor for low origination levels than lenders tightening standards, says Satyan Merchant, senior vice president and automotive business leader at TransUnion. But those subprime customers who do have auto loans aren’t paying them off at the same rate they did before the pandemic, he said.

“It’s safe to say lenders were looking at risk in a measured way, but that’s just part of the story,” Merchant said.

The serious delinquency rate, or auto accounts unpaid 60 days past due, rose to 1.57 percent in the fourth quarter, up from 1.5 in the fourth quarter of 2019.

Additional stimulus and flattening unemployment rates have kept delinquencies in check thus far in the pandemic, according to Merchant. The true test of how American vehicle owners fare amid pandemic conditions will occur once forbearance programs close in the second quarter, he said.

Credit activity was strong in the fourth quarter, though accounts in financial hardship status remained well above pre-pandemic levels. Consumer appetite for credit increased last quarter, according to the New York Fed report, with total household debt rising 1.4 percent to $14.56 trillion, driven primarily by activity in the housing market.

Auto origination volume softened in the fourth quarter compared with the third, according to the Fed, though it remained higher than pre-pandemic levels. Fourth-quarter origination volume of $161.6 billion was up 1.9 percent from the fourth quarter of 2019.

TransUnion reports origination data in arrears, meaning third-quarter data is the most recent available for the credit bureau.

The Fed’s origination data provides further evidence of the economy’s K-shaped recovery, where high-income Americans with top-tier credit continue to improve their situations amid pandemic conditions while consumers in the lower credit tiers and with lower income continue to decline.

Consumers with credit scores of 620 and below originated $28.1 billion in auto loans last quarter, down 9.4 percent from $31 billion in the fourth quarter of 2019. For consumers with scores of 760 and above, however, originations increased 5.6 percent to $58.1 billion.

Accounts in financial hardship improved across credit tiers in December from the prior month, though they remained higher than pre-pandemic levels.

The percentage of auto accounts in financial hardship for near-prime customers was 4.4 percent in December, while the figure was 9.8 percent for subprime customers. In December 2019, just 0.7 percent of near-prime accounts and 1 percent of subprime accounts were in financial hardship status.

Meanwhile, vehicle transaction prices continue to rise, driven by low inventory levels amid heightened consumer demand and the propensity of American consumers to purchase larger vehicles with pricey technology.

The average debt per borrower climbed 3.2 percent to $19,818 in the fourth quarter, TransUnion said. The total number of auto loans slid 0.4 percent to 83.5 million.