While demand continues to vastly exceed supply in the vehicle market, two reports on consumer credit suggest auto lenders loosened standards for subprime consumers as the nation took on greater amounts of asset-backed debt.
Economists and analysts say the loosening of credit standards at the lender level and the need to entice lower-credit consumers to purchase available inventory likely drove much of the sales activity the industry enjoyed the past few months.
Consumers paid down credit card debt in the first quarter while taking on automotive, mortgage and student loans at a higher rate, the New York Federal Reserve Bank said in its quarterly report on household debt and credit. Credit bureau TransUnion this week reported similar findings — customers taking on higher asset-backed loans and paying down credit card balances.
TransUnion noted that auto debt has accelerated, with the average balance on an auto loan reaching new heights. The average auto debt per borrower exceeded $20,000 for the first time since TransUnion began tracking the data in 2009.
The rise in the average debt indicates surging vehicle prices and fewer automaker incentives amid ravenous customer demand, said Satyan Merchant, senior vice president and automotive business leader at TransUnion.
"A vehicle that might have been $50,000 with incentives might have been $45,000, but today maybe that incentive doesn't exist," he said.
Meanwhile, credit access loosened in autos in the past quarter, signaling a reversal of the tighter standards lenders exercised at the onset of the pandemic. Merchant said he believes wider access to loans and continued government protections and stimulus will drive a rebound in subprime auto loan activity.
Ongoing government assistance programs are aiding in higher down payments, and lenders appear to be more accepting of credit-crunched customers than this time last year, said Jonathan Smoke, chief economist at Cox Automotive.
Dealerships and automakers are working to woo back the subprime consumers who were underrepresented in last year's buying pool, Smoke added, because those customers typically go after the vehicle inventory that's in highest supply — sedans.
Still, short supplies aren't keeping consumers from trucks and SUVs. Auto loan balances rose $8 billion in the first quarter, the New York Fed said. Auto loan originations, however, slid slightly to $153 billion.
Of those originations, 15 percent were extended to borrowers with credit scores below 620 — the lowest share seen in the history of the data.
Comparing federal studies to proprietary data from Cox's Dealertrack systems, Smoke said subprime shares rebounded much more strongly in March and April than current studies suggest.
"We, in essence, have just expanded the pool of people who can buy a new vehicle," Smoke said. "That pool was extremely narrow last year. The credit trends help to explain why we've had such incredible retail sales in both March and April."
Subprime shares in the new-vehicle market have been improving alongside credit conditions, though the rate remains much lower compared with a year ago, Cox data indicates. Though standards have relaxed from the early days of the pandemic, they're not exceptional, Smoke said. Rather, lenders are simply returning to normal standards amid the crisis. This is partly because the incentives for banks to lend are at an all-time high. With more money coming in from customers paying down debts and low delinquency rates from government forbearance programs, the risk of extending credit is minimal.
With each passing quarter, many prominent auto lenders set aside fewer reserves for credit losses, indicating the worst of the pandemic-induced panic is behind them, Merchant said.
"That's a reflection of what you're hearing from lenders and banks, which is that our portfolios are doing pretty well," he said. "We're not that concerned about delinquency."
