Is the Worst Over in Auto Loans?

If you watch the news, you might think you can’t possibly get an auto loan or a lease, and you might get the impression that consumers are defaulting on auto loans right and left. But if you take a look at the actual statistics (now why would television reporters do that?!), you’ll find that the reality is certainly unhealthy but not catastrophic. Some buyers are in trouble and may default on their auto loans, but the vast majority are making their payments. At the same time, lenders are being choosier about whom they lend money to, which means they are in a less risky position than they were last year.

According to credit-reporting service TransUnion, more drivers went 60 days or more “past due” on their loans in the fourth quarter of 2008 than in the third quarter, but average auto debt actually went down in the same period -- one sign that lenders are well on their way to cleaning up the mess they helped create. The information for the TransUnion analysis was culled from approximately 27 million anonymous, individual credit files, which means the service provides a real-life perspective on how U.S. consumers are managing their credit health.

A quick reading of that report card suggests that most consumers are doing a good job of maintaining their credit, while those on the fringe are running into difficulties in this sour economy. The national 60-day auto delinquency rate (the ratio of auto loan borrowers who are 60 or more days past due) edged upward between the third and fourth quarter of 2008 from 0.8 percent to 0.86 percent, which means that fewer than 1 percent of auto loan borrowers were delinquent for 60 days. While that might be reassuring, there is no doubt that delinquencies grew in the final quarter of 2008. The year-over-year delinquency rate increased by 8.86 percent in the fourth quarter.

One interesting bit of data that gives more perspective to the analysis is this: In addition to seasonality dependencies, the fourth quarter 60-day auto delinquency rate reflected the much stricter lending environment that the country experienced late last year versus the easier credit of 2007. Both the relative unavailability of funding in the market for auto loans and tighter lending standards significantly decreased the number of auto loans in the market, and this was a key factor in higher delinquency rates as a ratio of all auto loans, TransUnion said. In other words, because there were so many fewer auto loans, the percentage of those loans in delinquency rose, but it does not mean, as the TV news might suggest, that delinquencies “went through the roof.” For example, 14 states experienced a drop in their year-over-year delinquency rates compared to the 8.86 percent increase seen nationally, and 11 states experienced a decrease in the 60-day auto delinquency from the third quarter of 2008.

While this tempers the highly negative news that has circulated about car loans recently, there is still cause for concern. And there is little doubt that this recession cuts deeper than the previous, most recent recession.

“How does the rise in auto delinquency compare to the 2001 recession?” asked Peter Turek, automotive vice president in TransUnion’s financial services group. “Although that recession was short by most standards (beginning in March of 2001 and ending in November of the same year), the auto delinquency ratio increased by almost 10 percent. In contrast, in our current recession that began in December of 2007, we see that the auto delinquency rate has already increased by 25 percent -- more than double what occurred in the last recession, with an endgame that is still uncertain.”

The prognosis offered by TransUnion isn’t very positive, but it does not seem apocalyptic either. “Our current forecasting models indicate that the national 60-day auto delinquency rate will rise from a value of 0.86 percent in the fourth quarter of 2008 to over 1 percent by the end of this year,” Turek said. “The overall economy, weak labor market and lower disposable income levels continue to negatively impact the consumer.”

For the average consumer, the takeaway is that while requirements have tightened a bit, credit for car loans is still widely available, and the financial institutions are making some progress in ridding themselves of bad loans that cost both them and all consumers who borrow money.