TransUnion Predicts Auto Loan Lending and Delinquency Rise in 2014

toy car on hundred dollar bills
According to a TransUnion report, 2014 will be a year of increases in both auto loan lending and payment delinquencies.

The average automotive debt per borrower is expected to increase from a 2013 figure of $16,942 to a 2014 figure of $17,966.

Auto loans that are 60 days or more past due are expected to increase from 1.1 to 1.19 percent. However, this is still below the delinquency peak of 1.59 percent in Q4 2008.

The report also highlighted how auto loan lending has been on a positive trend since Q4 2010.

Borrowers with subprime credit scores made up 29.8 percent of all auto loans in the third quarter of 2013, while in 2008 borrowers with subprime credit accounted for 34.6 percent in 2008.

Peter Turek, Automotive Vice President in TransUnion’s Financial Services Business Unit, wasn’t intimidated by the uptick in delinquencies.

“While we expect auto loan delinquencies to rise in 2014, they will remain well below levels observed during the recession and its immediate aftermath,” he said in the report. “One of the primary drivers for low delinquency rates is the strength of the used car market; borrowers who cannot afford their car loan payments usually have the option of selling the car and becoming whole on the loan.”

Necessity, Consumer Confidence, Financial Amnesia, and Lenders

Gail Cunningham, Vice President of Membership and Public Relations at the National Foundation for Credit Counseling said that there are four main reasons why delinquencies and lending will increase in 2014: necessity, consumer confidence, financial amnesia, and lenders.

The first reason, necessity, simply means that consumers and drivers have no other option but to purchase another vehicle. In order to purchase a vehicle, they often need an auto loan.

“Perhaps people have held off spending, certainly on major purchases, as long as they can,” said Cunningham. “There was an uptick in vehicle purchasing that began last year, and apparently is forecasted to continue. I haven’t looked up the age of the average car on the road, but it’s always older than I would have thought.  Therefore, people may legitimately need a new vehicle.”

The second reason, consumer confidence, is clearly reflective of the economy.

While the stock market has rebounded and many other people have gained wealth as foreign wars have wound down, there is a sense of stability in the air. As a result, people are more willing to make a major purchase, such as an automobile, especially if they have paid down their debts. Of course, cars are also an integral part of the American dream and the American sense of independence.

Financial amnesia, the third reason, is more of an ill omen for consumers.

“This is what I’m calling prematurely forgetting the sins and the pain of the past,” said Cunningham. “Americans are a hopeful lot of people, preferring to think that things will work out well.  That’s a nice trait to have unless it involves ignoring the financial facts.”

The fourth and final reason, lenders themselves, begs the question of whether or not many of these new auto loans being lent out are being responsibly underwritten.

“They have extended the term of a vehicle loan in order to make the monthly payments more affordable, but if delinquencies are high in spite of that, it becomes obvious that the loans are not sustainable,” said Cunningham. “Could they, too, have a case of financial amnesia?”