TransUnion: Rise in 'subprime' borrowers pushed up late payment rate on US auto loans in 1Q

LOS ANGELES, Calif. – Banks are increasingly extending auto-loan financing to borrowers with less-than-sterling credit, a trend that’s contributing to a higher rate of missed loan payments.

The rate of U.S. auto-loan payments late by 60 days or more rose to 0.88 per cent in the first three months of the year, credit reporting agency TransUnion said Tuesday.

That’s up from 0.82 per cent in the first quarter last year, but down from 1 per cent in the last three months of 2012, the firm said.

Among subprime borrowers, or those whom lenders deem a higher credit risk because of their track record of managing debt, the delinquency rate jumped to 5.5 per cent in the first quarter from 5.09 per cent a year earlier.

Steady job gains, low interest rates and improving consumer confidence have helped spur U.S. sales of cars and trucks. Many Americans are moving to replace older vehicles after holding back on purchases for several years following the last recession. Vehicle sales climbed 8 per cent in May to 1.4 million.

Lenders have responded, making loans available to more borrowers, even those with less-than-perfect credit.

“Lenders have determined that their portfolios can handle additional risk at this point in the business cycle,” said Peter Turek, automotive vice-president at TransUnion.

As lenders continue to increase financing to high-risk borrowers, there’s a greater chance those borrowers could fall behind on payments, Turek added.

Subprime borrowers accounted for 15 per cent of all U.S. auto loans in the first quarter, unchanged from a year earlier. That share of all auto loans remains smaller than it was in the first three months of 2009, when subprime loans made up 20.3 per cent of all auto loans, according to TransUnion.

All told, auto loan volume grew 6.1 per cent in the first quarter versus the same period last year.

As lending has picked up, so have average balances on auto loans.

One reason for that is that banks are making more auto loans, which tend to have higher balances early on, as it typically takes several years for borrowers to pay them down.

For the January-March period, the average balance of a U.S. auto loan was $13,260, up 4 per cent from $12,755 in the same period last year, the firm said.

Among subprime borrowers, the average auto loan balance grew 6.6 per cent to $12,006 in the first quarter.