The Stellar Financial Group’s Post

Auto lending. We've seen delinquencies / charge offs have been on the rise. Across all credit levels. We've talked about the stress that is building on the bottom end of credit and with younger borrowers. Somewhere in late 2022 we saw lenders start to tighten in credit with this space and the numbers are now starting to show it. "Access to auto credit is the lowest since August 2020, with the approval rate for loans down 1.6 percentage points year-over-year, according to Cox Automotive. At the same time, the percentage of US auto loans 90 days or more delinquent rose above pre-pandemic levels to 2.66% in the fourth quarter of 2023, according to data from the New York Federal Reserve. That compares to 2.37% at the beginning of 2020 and a 15-year average of 2.16%." "With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards. That's freezing out buyers with lower credit scores who can't afford a large down payment, while Americans with healthy finances are having more trouble than usual securing loans." "Still, tighter lending standards are hurting those who need the loans the most and can't afford to wait" "Consumers who can make larger down payments or buy with all cash are still purchasing new cars without much trouble." #auto #credit #lending

[NEWS] Car loans are pushing budgets to the brink: Auto loan delinquency rates hit 3.7% in July – That makes 34 consecutive months of YoY increases. As you’d expect, heavy inflation, high interest rates, and unaffordable car prices are still putting the squeeze on consumers. But surprisingly, it’s not just subprime borrowers feeling the pinch… Delinquencies among prime borrowers (credit score: 660-719) have jumped 85% from 2019 levels. Bottom line: All eyes are on the Fed's next move—with interest rate cuts and a relatively strong job market, we could start to see delinquencies slow down. Read today’s top automotive stories, presented by OPENLANE US: https://lnkd.in/d87MrJur (Data source: Moody’s Analytics via Auto Finance News)

🚩The irresponsible banks are showing cracks, while the puzzle of low unemployment and rising delinquency of prime and subprime borrowers is of serious concern (Thanks to the various "forbearance" programs). 🚩 The transition of prime and subprime borrowers into the delinquency category is not just a trend, but a rapid and concerning phase. Even more worrying, borrowers with top credit scores have been falling behind on their auto debt at an accelerated pace over the years. 🚩 The Bank’s dealerships are at greater risk of defaulting floor plan loans due to low sales. The combination of high prices and credit score migration allowed many borrowers to access credit (which they otherwise might not have been able to) to purchase vehicles whose prices had risen significantly over a relatively short period of time. https://lnkd.in/eS8Tw3p6

🚩The irresponsible banks are showing cracks, while the puzzle of low unemployment and rising delinquency of prime and subprime borrowers is of serious concern (Thanks to the various "forbearance" programs). 🚩 The transition of prime and subprime borrowers into the delinquency category is not just a trend, but a rapid and concerning phase. Even more worrying, borrowers with top credit scores have been falling behind on their auto debt at an accelerated pace over the years. 🚩 The Bank’s dealerships are at greater risk of defaulting floor plan loans due to low sales. The combination of high prices and credit score migration allowed many borrowers to access credit (which they otherwise might not have been able to) to purchase vehicles whose prices had risen significantly over a relatively short period of time. https://lnkd.in/eCujrTAZ

Like a case of long Covid, the impact of pandemic-period auto industry trends will be with lenders and borrowers for some time yet. It's thanks to a cascade of factors: increasing numbers of defaults on higher balance loans, an increase in repossessions in the wake of those defaults, and higher losses on those loans, due to the difference between COVID-level auto prices and today’s lower levels. Many loans are “underwater” in relation to current values. Read Steve Cocheo's latest piece:

🚩The irresponsible banks are showing cracks, while the puzzle of low unemployment and rising delinquency of prime and subprime borrowers is of serious concern (Thanks to the various "forbearance" programs). 🚩 The transition of prime and subprime borrowers into the delinquency category is not just a trend, but a rapid and concerning phase. Even more worrying, borrowers with top credit scores have been falling behind on their auto debt at an accelerated pace over the years. 🚩 The Bank’s dealerships are at greater risk of defaulting floor plan loans due to low sales. The combination of high prices and credit score migration allowed many borrowers to access credit (which they otherwise might not have been able to) to purchase vehicles whose prices had risen significantly over a relatively short period of time. https://lnkd.in/eCujrTAZ

How are you navigating the affordability crunch in auto sales? As interest rates soar and vehicle prices remain high, dealers face tough challenges, especially with subprime buyers. The latest data from the New York Federal Reserve highlights a shift: superprime customers are borrowing more, while the number of subprime loans remain stagnant. Don’t alienate your buyers, give them a solution that offers them affordability and a way to fight high interest rates! #autofinance #dealerships #financing

🚗 Why Auto Lenders Have Tightened Their Standards Auto lenders are originating meaningfully fewer loans now than pre-COVID-19. To be specific, lenders generated 23% fewer loans in Q1 of this year vs. Q3 of 2019. Why? Loan interest rates are way up compared to then, as are vehicle costs. People also have agreed to longer loan terms on average. Lenders also have become stricter. And negative equity is a big reason why.

Auto lending. Longer terms, such as 84 month lending, have become more common. So too have higher rates. We've certainly seen delinquencies on the rise in the last 6 months. Negative equity in a vehicle is back. Could lead to further weakening of performance in 2024. "Prices for new vehicles are high. Interest rate hikes have made loans more expensive. And many car owners now owe more on their loans than their vehicle is worth. This situation — commonly called being "underwater" or having "negative equity" — occurs when the price of a car falls faster than the owner can pay down the loan for it" "In November, people with negative equity were underwater by an average of $6,054, the most since April 2020 and well above pre-pandemic averages" "The last time the average negative equity was this high — $6,078 in April 2020 — Americans were rushing to trade in their vehicles after the Fed cut rates in response to the start of the pandemic. At the time, car owners with high payments recognized they could either refinance or switch out their car for another at a lower rate, even if that meant rolling over some negative equity. In 2019, the average negative equity hovered around $5,300" "The average rate for a loan on a new car is 7.4% and 11.6% for a used vehicle. Plus, in recent years, dealerships and lenders have started offering six- and seven-year loan terms, as well as lower down payments, which make it harder for owners to build equity in their vehicle." "For instance, say someone borrowed $20,000 on their car and can't keep up with the payments. They might try to trade in the car, only to find that the vehicle is worth only $18,000 now, and they still owe $19,000 on the loan. That means they have to come up with the $1,000 to repay their lender." #banks #creditunions #autos #credit #lending #rates https://lnkd.in/eKj8hPJ6

Auto loans are underwater - as used car prices have fallen (over (20)%) from their pandemic-era heights: ⤵⤵⤵ ➡ During the pandemic, supply chain issues drove up used car prices ➡ While some level of negative equity in auto loans is common, the rise may be a cause for concern ➡ Longer-term auto loans, higher rates, and an easing of supply chain issues have helped to create the situation wherein the average negative equity of $6,054 is the highest since April 2020 and well above pre-pandemic levels ➡ At the same time, NYFed data has shown that auto 30+ DPDs have risen above pre-pandemic levels ➡ Additionally, Fitch Ratings data showed that auto subprime 60+ DPDs are the highest on record (data going back to 1994), at 6.1% On the bright side - many metrics still point to consumer strength ➡ Q3 spend volumes were up YoY, +7.7% at J.P. Morgan, +6.5% at American Express, +6.1% at Capital One (credit cards), +3.3% at Bank of America, and +0.7% at Discover Financial Services ➡ Online Black Friday sales were strong, up 7.5% per Adobe Analytics data and 9% per Salesforce data ➡ And this morning - we got positive initial jobless claims data showing that initial claims came in at 205k, below estimates of 215k, remaining near historic lows ➡ ➡ What do you think? Canary in the coal mine for the consumer? Or will a strong labor market keep auto's negative equity and delinquencies from rising higher? If you found value from this post, please like 👍 and share for visibility. ➡ ➡ ➡ Follow/connect with me here for more fintech and consumer lending coverage. Link to Claire Ballentine's Bloomberg article covering negative equity for auto loans in comments: ⤵⤵⤵ Image credit: Bloomberg