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While the first quarter of 2020 saw disruptions in the auto finance market due to COVID-19, the second quarter numbers show positive signs of recovery. There’s no doubt there has been a lot to keep up with this year, and having a solid pulse on the current market trends can help increase your financial institution’s auto loan portfolio.
Experian recently released their State of the Automotive Finance Market report from Q2 of 2020. I'd like to share some highlights of the report with you and offer insight for your financial institution on the state of the auto finance market going forward into the third quarter of this most unusual year.
Captives Show Large Share Increase for New Financing
Captives experienced a large share increase in the auto market for new financing. In June 2019, market share for captives was at 55.1%. That percent rose to 65.5% in June 2020. Banks decreased their share year-over-year from 28.0% in Q2 2019 to 23.9% in Q2 2020. Market share for new financing for credit unions and finance companies decreased only slightly from 11.8% to 10.2% and 5.2% to 4.6%, respectively.
Credit Scores Increase for New Financing
Credit scores continue their upward trend, with scores for new financing increasing sharply in the second quarter of this year. The average score for new financing on leases rose from 724 in Q2 2019 to 729 in Q2 of 2020. Credit scores on new loans rose five points year-over-year, up from 713 to 718. The average increase of credit scores across all new financing increased from 717 to 721.
New Subprime Loans Reach an Eight-Year Low
According to Investopedia, “A subprime auto loan is a type of loan used to finance a car purchase that’s offered to people with low credit scores or limited credit histories. Subprime loans carry higher interest rates than comparable prime loans and may also come with prepayment penalties if the borrower chooses to pay off the loan early.”
The Experian report for Q2 2020 shows that new subprime loans have hit an eight-year low at 8.01%. The last time this happened was in 2011, when the number was 8.02%. New subprime loan originations were at 10.28% in Q2 2019, reflecting a 2.27% decrease year-over-year. Deep subprime loan originations are also at the lowest they’ve been in eight years, sitting at just 0.37% for this quarter.
Record High New Loan Amounts Drive Increased Payments
Average loan amounts and monthly payments reached record highs again this quarter. The average new loan amount across all risk groups was $36,072, up $3,953 year-over-year. Average new loan payments averaged $568 across all risk tiers, resulting in an average increase of $18 per monthly payment.
Shift to Full-Size Pick-Ups
What are consumers purchasing? Full-sized pick-ups have moved back to the top spot, accounting for 16.09% of new sales. Shifts in consumer purchases to full-size pick-ups drove increased loan amounts resulting in higher payments while loan terms extended in the second quarter of 2020. Small-and mid-sized SUVs also performed well, accounting for 14.33% and 14.14% of new auto sales in Q2.
Loan Loss Coverage Ratio Reaches All-Time High
Finally, as lenders look down the road toward the end of 2020 and into 2021, they are preparing for higher delinquencies and charge-offs by bolstering their Provision for Loan Losses. As evidence of this trend, the Loan Loss Coverage Ratio for credit unions was at an all-time high of 172% at the end of Q2.
Global Consumer Confidence Index Declines Sharply
According to The Conference Board, “In 2020 Q2, The Global Consumer Confidence Index fell sharply from a near historic high of 106 in Q1 to 92, indicating there were more pessimistic consumers than optimistic ones globally for the first time since 2016 (a reading below 100 is considered negative). The 14-point drop is the largest quarterly decline since the index began in 2005 Q1 and is double the largest drop in the index during the global financial crisis in 2008-09.”
This has created an opportunity for financial institutions to start positioning products that will speak to the needs of the anxious consumer in 2020. SWBC’s MPOWER+ Vehicle Protection Program offers your borrowers financial security by allowing them to return their vehicle if they experience a qualifying event, protecting their credit rating. To learn more about the MPOWER+ program, click the banner below.
As Senior Vice President of Automotive Products, Michael works closely with our Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages for our clients. He is responsible for quality assurance, including premium refunds, claims, asset recovery, and vehicle title administration operations.