Slight Growth in Delinquent Payments and Interest Rates

Although the automotive credit market has shown remarkable stability for several consecutive quarters, 30-day delinquency rates reflected a slight increase in at-risk dollars in the third quarter. Additionally, 60-day delinquencies grew to 0.74% in the third quarter of last year, as compared to 0.67% at the same time in 2015.

Being somewhat risk averse, credit unions are faring very well when looking at delinquency rates. In the third quarter, 30-day delinquencies for credit unions were at 1.35%, compared to an industry average of 2.38%. For 60-day delinquencies, credit unions were at 0.34%, compared to the industry average of 0.74%.

Another good factor for credit unions is the ability to remain competitive when interest rates slowly tick up all around them. Signs of an improving economy have caused interest rates for new vehicle loans to inch up overall, going from 4.63% in Q3 2015 to 4.69% in Q3 2016. This increase played a key role in driving more market share of auto loans to the credit unions.

Average Credit Scores on the Rise

While the recent data on delinquency rates don't reflect seismic shifts in lending, they do reflect the market response of lenders pulling back on loans to riskier consumers. In Q3 2016, the average credit score for a new vehicle loan rose two points to 712 from 710 in Q3 2015. In addition, market share of loans to subprime and deep subprime consumers (those with a credit score of 600 or less) dropped from 21.3% in Q3 2015 to 20.39% in Q3 2016.

With so few consumers in the subprime and deep subprime risk tiers, credit unions do not lose many borrowers when the market pulls back on riskier loans. And, when interest rates go up, consumers tend to look harder for the most competitive rates. The two phenomena combined to create favorable conditions for credit unions.

Favorable Outlook Moving Forward

Moving forward, credit unions need to keep an eye on delinquencies, interest rates and average credit scores for both new and used vehicle loans. An uptick in delinquencies would likely cause further shifts away from loans to consumers in the subprime and deep subprime risk tiers. While this will impact finance companies that specialize in subprime and deep subprime loans the most, the shift could also lead to additional market share gains for credit unions as finance companies pull back their lending. And, with interest rates so low for so long, another mild uptick could push more consumers toward the competitive rates of the credit unions, so get ready.

Melinda Zabritski is Senior Director of Automotive Credit Experian is 714-830-7734 or [email protected].