TransUnion recently released its latest Credit Industry Insights Report (CIIR), a quarterly publication that provides details and perspective on credit trends. This report covers all areas of consumer credit, and its latest auto finance data paints a nuanced picture, reflecting both challenges and opportunities for industry players.
The most recent quarter showed a noteworthy 4.26% uptick in auto originations, providing optimism for market leaders. That said, this increment is set against a 9.38% decline in year-over-year origination volume overall. The 6.12 million originations in the first quarter of 2023 marked the lowest Q1 figure since 2013, highlighting a subdued market sentiment. The overarching narrative revolves around higher prices and limited availability, both dampening consumer demand overall.
Notably, the used vehicle market offers a silver lining, with prices beginning to ease. This development Is likely to spur interest among price-conscious buyers and potentially drive increased used car sales. The dynamic between pricing and consumer behavior, such as extending loan terms to manage monthly payments, underscores the delicate balance that borrowers seek between affordability and their automotive preferences, and the responsibility lenders and loan servicers have to provide adaptable repayment options.
While the auto market grapples with the impact of pricing and supply constraints, a parallel challenge arises from interest rate fluctuations. The Federal Reserve’s ongoing series of interest rate hikes have led to a significant spike in auto financing rates, impacting consumers’ ability to secure affordable loans. This underscores the intricate relationship between macroeconomic trends and the day-to-day experiences of both borrowers and lending institutions.
Remarkably, total auto balances show resilience, climbing 5.84% year-over-year to reach a substantial $1.55 trillion. This growth is particularly evident across subprime (15.2%) and super-prime (10%) segments. Such growth, despite the backdrop of volume declines, hints at the shifting preferences and priorities of consumers. Notably, younger generations, including Gen Z (27.2%) and Millennials (8.3%), are contributing significantly to this upward trajectory.
Delinquency rates provide a critical lens through which to assess the industry’s health. Serious account-level delinquency totals increased 2 basis points quarter-over-quarter and 27 basis points year-over-year for auto. However, this increase should be reviewed against the backdrop of declining account volumes, which can inflate delinquency percentages. To gain a clearer picture, analyzing vintage delinquency curves offers deeper insights.
Recent auto vintages do exhibit some level of deterioration, especially within the used vehicle category. This trend, while concerning, doesn’t reflect a severe crisis. Rather, it signifies the need for flexible strategies to mitigate potential risks within certain vehicle segments.
For loan servicing providers, these insights underscore the importance of adaptability and foresight. Crafting bespoke repayment solutions that consider consumers’ financial constraints is pivotal, particularly as affordability concerns rise due to interest rate hikes. Additionally, staying informed of shifting generational dynamics is essential, as younger consumers emerge as driving forces behind balance growth.
Furthermore, the nuanced delinquency landscape requires a balanced approach. While the increase in delinquency rates could raise eyebrows, the decline in account volumes plays a pivotal role in interpreting these figures. Loan servicing providers must focus on risk management without overreacting to fluctuations that are partly attributed to shifting market dynamics.
The auto finance industry stands at an inflection point, poised between challenges and opportunities. Loan servicing providers can leverage information from industry reports such as these to make logical decisions, design targeted strategies, and weather the changing tides of the auto financing landscape. By adopting a proactive approach and embracing change, providers can ensure sustainable growth in an ever-evolving market.