Is the subprime auto loan industry in a bubble that will burst in the next 12-18 months?
Report Available: August 17, 2016
Blueshift’s initial research shows record highs for total auto loans exceeding $1 Trillion, average loan amounts of $30,000, average monthly payments of $500, and average length of payment of 68 months. At the same time, the number of subprime borrowers is climbing, as is the delinquency rate. However, some acknowledge that these trends are not cause for grave concern as they are within the normal range and are still below pre-financial crisis levels.
- Experian Automotive’s Melinda Zabritski presented The State of the Automotive Finance Market for Q1 2016. Key findings include:
- Portfolio balances reach record levels as loan amounts grow to all-time highs.
- Increases in both 30 & 60-day delinquency rates rise as the percentage of loans in the subprime portion of open portfolios grow.
- Loan amounts and payments reach all-time highs for new loans while terms continue to extend.
- Banking and investment heavyweights are raising the caution flag regarding the rise in subprime auto lending issues. JPMorgan Chase CEO, Jamie Dimon said “someone is going to get hurt.” Jim Chanos, founder of hedge fund Kynikos Associates said “what we’re seeing is in some markets lenders are lending 125% on used car values … which should scare the heck out of everybody.” Mark Williams a Boston University finance professor, sounded a warning in April, saying “a collapse of subprime auto lenders could turn into a systemic problem, as they infect other financial institutions with whom they do business. It may not be a Lehman event, but it would have an impact.”
- In the May/June issue of Subprime Auto Finance News, sources acknowledged that the use of subprime lending has grown in recent years, but there is no reason to expect an auto lending crisis. TD Economics economist Dina Ignjatovic said these types of loans are “well below where they were prior to the financial crisis.” Experian’s Zabritski added “while rates in the more severe delinquency category are up, it’s important to note that the increases are modest and relatively low from a historical perspective.” The 13.1% Q1 rise in loan delinquencies was described as ‘natural’ in the same publication.
- Most sources in Blueshift’s Feb. 4, 2016 auto financing report thought the rate of subprime lending was not alarming. Many consumers were slowly improving their credit ratings following the recession, and auto loan default rates were in line with historical patterns and were actually declining.
Are subprime auto loans actually in a bubble? Will this bubble soon pop? Are other weak economic indicators the beginning of a new downturn, and if so, will subprime auto loans be the first to break? To gain insight into the subprime auto loan market, Blueshift will gather data and issue a market research report from independent sources in the following areas: Used car dealership executives, auto finance companies, auto repossession companies, and industry specialists.
Companies: Credit Acceptance Corp (CACC), Santander Consumer USA Holdings (SC), Ally Financial (ALLY), Springleaf Holdings (LEAF), Lithia Motors (LAD), America’s Car-Mart (CRMT), ACE Limited (ACE), AutoNation (AN), Capital One Financial Corporation (COF), Sonic Automotive (SAH), Penske Automotive Group (PAG), Group 1 Automotive (GPI), CarMax (KMX)
Research Begins: August 1, 2016