2016 is lining up to be another solid year for auto lenders. Bolstered by strong economic fundamentals, auto lending will continue to grow at a healthy pace. At the same time, auto delinquencies are expected to remain stable.
TransUnion’s 2016 auto loan forecast projects that between year-end 2015 and year-end 2016, account level serious delinquency (the number of accounts 60 or more days past due) will remain level at a historically low rate of 1.11%.
We are projecting that delinquency rates will stay low and do not expect a change as consumers continue to prioritize auto loans. Since reaching 1.54% in the fourth quarter of 2009, auto loan delinquency rates have declined 28%.
With low default rates—supported by a robust job market, low interest rates and consumer confidence—auto lenders are feeling confident about extending credit to more borrowers.
Our forecast also projects that between year-end 2015 and year-end 2016, total auto loan balances will grow 3%. In Q3 2015, for the first time, the auto finance industry has reached $1 trillion in outstanding loans and leases. At the end of Q3 2015, the average auto loan balance was almost $18,000. TransUnion predicts that by Q4 2016, the average auto loan balance per consumer will grow to $18,509. This increase is consistent with the $500 or more per year growth we’ve seen in auto balances since 2009, when average balance per consumer was just a few dollars under $15,000. At about 3% per year, the change in average balance reflects the healthy growth in auto sales, with new loans of modestly greater amounts financed offsetting the declining balances of existing loans.
The number of consumers with an open auto trade has also increased year over year, starting back in Q3 2011. In Q3 2015, the number of open auto trades increased 8.2% over the prior year, reaching 69.4 million.
Some industry observers are concerned that the strong growth in auto lending is a bubble about to burst, similar to the mortgage bubble that resulted in part due to loans made to subprime borrowers. Our data rejects this bubble theory because there actually are fewer subprime auto borrowers as a percentage of the total now than there were at the end of the last recession. Subprime consumers (those with a VantageScore 3.0 credit score lower than 601) accounted for only 18.7% of all auto loans in Q3 2015, down from 23.7% in Q3 2009.
For auto lenders, these trends point to sustained opportunities for growth in 2016. Continued economic health and an improving job market, along with low gas prices, are boosting consumer confidence. Stable delinquencies in both the prime and subprime risk segments mean that auto lenders may be able to offer more favorable auto loan terms to consumers and increase the number of loans to non-prime borrowers.
In fact, the data suggests that auto lenders may have attractive opportunities to expand their presence in non-prime and subprime auto finance. My personal experience in non-prime lending has taught me that one needs to look beyond the traditional credit score to better segment risk and create competitive advantage in the market. By incorporating trended and alternative data into underwriting models and credit policy, auto lenders may be able to extend loans to additional consumers who were previously outside of their risk tolerance, or unscorable.
According to our 2016 auto loan forecast, auto lending has achieved a healthy balance between growth and delinquencies. For auto lenders, it may be time to take advantage of that equilibrium.