According to a recent Credit Industry Insight Report (CIIR) by TransUnion, the delinquency rate for auto loans in the United States has surpassed levels last seen during the Great Recession. The account-level delinquency rates for auto loans that are 60+ days past due have risen from 1.43% in Q1 2021 to 1.69% in Q1 2023, an increase of 26 basis points. This surge in delinquencies is primarily concentrated in the subprime segment of the market.
As a result of the rising delinquencies, various lenders, including captive finance companies, banks, credit unions, and independent lenders, have tightened their underwriting standards on new and used vehicle loans. This tightening is aimed at reducing losses due to charge-offs. However, it is important to approach these numbers with caution and avoid drawing sensationalistic conclusions about the broader auto-financing market, as highlighted by TransUnion and S&P Global Mobility analysts.
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It is worth noting that the spike in delinquencies is not affecting a significant portion of lenders, such as OEM captive finance companies and major banks, who primarily deal with near-prime, prime, prime-plus, and super-prime originations. The independent lenders operating in the subprime space, who primarily provide loans for used vehicle purchases, are bearing the brunt of the delinquencies.
The rising interest rates and inflation are impacting the average American consumer’s monthly budget, making it more difficult to meet various financial obligations. People rely on their vehicles to commute to work and earn money, which further emphasizes the importance of timely auto loan payments. However, it is important to note that the performance of newer loan vintages in the new-vehicle segment remains relatively strong, even surpassing pre-pandemic portfolio performance at the same age.
In the used-vehicle market, lenders have swiftly responded to manage delinquencies, resulting in improved performance of originations in the second half of 2022. However, the market for used cars is expected to remain tight due to low new car sales in recent years, leading to fewer recent model-year used cars available. Affordability remains a critical factor for consumers, particularly those with credit scores below prime.
The combination of tighter underwriting standards, higher interest rates, and limited used-car inventories has led to a decrease in loan originations. Q1 2023 saw the lowest number of originations in four years, reflecting a decline from Q1 2022. The pandemic-induced economic downturn prompted lenders to reduce their involvement in the subprime market, causing subprime volume to decrease in Q1 2021 and Q1 2022 before rebounding slightly in Q1 2023.
The auto lending industry in the United States is not the only sector experiencing increased delinquency rates. Delinquency rates have risen across most major lending products since Q1 2021, with the exception of mortgages, which experienced a slight decline in Q1 2022 and remained relatively flat from Q1 2021 to Q1 2023. Bankcards and unsecured personal loans (UPL) have seen particularly significant increases in delinquency rates, with bankcard delinquencies rising by 80 basis points and UPL delinquencies rising by 110 basis points in a two-year period since Q1 2021.
Source: S&P Global Mobility
