Car loans now top $1 trillion as delinquency rates rise

DETROIT — Americans are borrowing more than ever for new and used vehicles, and 30- and 60-day delinquency rates rose in the second quarter, according to the automotive arm of one of the nation's largest credit bureaus.

The total balance of all outstanding auto loans reached $1.027 trillion between April 1 and June 30, the second consecutive quarter that it surpassed the $1-trillion mark, reports Experian Automotive.

More consumers also are turning to leases, which accounted for 31.44% of all new car and truck transactions in the second quarter, up from 26.9% a year earlier.

Both 30- and 60-day loan delinquencies rose, but the combined subprime and deep-subprime share of new and used auto loans and leases dropped from 23.3% in the second quarter of 2015 to 22.8% in second quarter of 2016.

“Yes, subprime and deep-subprime loans are growing, but the entire market is growing from a volume perspective across all risk tiers," said Melinda Zabritski, Experian senior director of automotive finance. "In fact, the subprime loans have actually dropped as a percentage of the total market. That, combined with only a slight uptick in delinquencies, makes clear that the sky is not falling.”

But the growing leverage that is supporting the industry's near-record sales remains cause for concern.

The average new car loan was $29,880, up 4.8% from the second quarter of 2015, and about $4,000 less than the average new vehicle selling price.

The average monthly payment on those loans was $499, up from $483 a year earlier. A growing portion of those loans are for a longer term, sometimes as long seven years.

Last month, Fitch Ratings issued a report that found that among subprime and deep subprime borrowers (those with a FICO score of less than 600) the percentage that are 60 days or more behind on payments reached 4.59% in July, a 17% increase from a year earlier.

While the major automakers have said their captive finance arms like Ford Credit and GM Financial, have not moved aggressively into subprime lending, Ford executives did acknowledge in July that rising delinquencies were one of several factors causing them to warn that business would be more difficult in the second half of 2016.

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.

General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

The increase in leasing could have repercussions in the next two to five years. As more of those leased vehicles are returned it will tend to depress the price at which they sell at auctions.

That means people wanting to trade in a 5- or 6-year old vehicle to buy a new one, will get less money for their trade-in, meaning they will have to borrow more, consider leasing, or considering a used vehicle.

“One of the biggest trends we see is the shift to used vehicles by customers with excellent credit,” Zabritski said. “As new vehicle prices continue to rise, savvy consumers are looking for ways to control costs. That appears to be pushing more customers toward used vehicles.”