The economy has been robust over the past several years. In fact, July 2019 set a record for the longest economic expansion in U.S. history at 121 months.1 Unemployment rates have reached low levels not seen since the late 1960s, and as a consequence, consumers have been well-positioned to pay their loans. Delinquency rates for most credit products have been quite low. But with such a long expansion behind us, it’s not surprising that speculation about a potential recession is ramping up, along with concern for what the consequences of that downturn might be. One area of focus for that concern is in delinquent auto loans and leases, which has been the topic of some significant headlines lately.
But when we read those headlines about auto delinquency rates, it’s important to understand the definitions used in the studies referenced and take a good look to see if the metrics support the conclusion that the auto loan market is indeed deteriorating. To examine this question directly, we decided to explore the TransUnion consumer credit database to analyze how many consumers with an auto loan or lease in financial distress in the past might remain in distress today.
Auto Delinquency Dynamics in Today’s Market
As of the end of Q1 2019, 85.7 million consumers had an active auto loan or lease. Of those, 3 million consumers are currently past due — but have not yet charged off.2 There doesn’t seem to be any disagreement that we can consider these consumers to be in financial distress. But what about consumers who charged off on an auto loan or lease at some point in the past? Is it reasonable to consider them still financially distressed?
Our analysis found that 17 million consumers are on record as ever being delinquent, charged off or bankrupt on an auto loan or lease over the past 7 years, which is as long as most negative information (except for certain forms of bankruptcy) can remain on the consumer credit file. Others may have been delinquent on an auto loan or lease earlier than that, but those flags would have been removed from the credit file in compliance with applicable federal laws and regulations.
However, ever delinquent doesn’t mean these consumers can never get a loan again. To the contrary, the general public policy consensus is that consumer lending laws are (and should be) written to provide consumers the opportunity to redeem themselves over time. In many cases, consumers who struggled in the past have put that chapter of their lives behind them. In fact, of those 17 million consumers whom we know performed poorly on an auto loan or lease in the past, 4.8 million currently have an auto loan or lease that is in good standing. And an additional 2.6 million of those 17 million consumers opened a new auto loan or lease after their charge-off and have already paid it off. So is it still fair to consider those consumers financially distressed? Given that these consumers are able to make payments on their subsequent auto loans and leases, we would argue the answer is NO.
Serious Delinquency Rates and the Auto Loan Borrower
There’s also been speculation that auto delinquency rates are rising, despite a shift in lender focus to originating loans to lower-risk borrowers.
Looking at serious delinquency for auto loans, the rate of consumers 60 days or more past due did tick up slowly between Q1 2015 and Q1 2017. Since then the serious auto delinquency rate has remained quite stable. Q1 2019 was the seventh consecutive quarter with a year-over-year delinquency variation of less than 10 basis points.3
Additionally, consumers at both ends of the risk spectrum led the growth in auto originations (viewed one quarter in arrears) at the end of 2018. Super prime auto originations grew 5.2% year-over-year, while subprime originations grew 4.4% year-over-year.4
Definitions matter. To answer our initial question of whether the consumers who ever went delinquent, charged off or went bankrupt on an auto loan at some point in the past are still in financial distress, we can make a strong argument that many are not. With millions of these consumers performing well and overall auto delinquency rates low today, we do not think the metrics support the conclusion that there is a crisis brewing in the auto loan marketplace.
1Source: National Bureau of Economic Research
2Source: TransUnion consumer credit database