There is always something going on in the car trade.
The last four years have shown this clearly: 2020 saw the COVID lockdown, 2021 saw pent-up demand, 2022 saw supply bottlenecks, and 2023 saw an inflation-related crisis that has continued into the current year and is straining many consumer budgets.
Car dealers see everything.
“Dealers are seeing that the people who come to them are being affected by inflation,” Satyan Merchant, senior vice president of automotive at TransUnion, tells WardsAuto. “The world has changed. The auto business has become volatile in the last few years.”
The cumulative result is that consumers are doing as much or more with less, which is hurting many people’s ability to make their monthly car payments on time, according to a new study from TransUnion.
Monthly payments now “terribly high”
The analysis shows that total monthly debt for auto borrowers has increased by 18% in just two years. Monthly car payments averaged $512 in the first quarter of 2022, compared to $581 in the first quarter of 2024 – an annual increase of $828.
“That’s terribly high,” says Merchant.
In addition, the growth in auto loan payments exceeds income growth, which leads to an increase in arrears.
Credit tracker TransUnion reports that the 60-day delinquency rate was 1.19% in the first quarter of 2023. In the first quarter of this year, it rose to 1.33%.
According to TransUnion, delinquencies reached Great Recession levels as savings declined and car payments rose faster than inflation and income growth.
Today’s increasingly tight consumer budgets are part of the ever-changing automotive market.
“Just as auto inventories began to recover from the worst of the pandemic era, supply chain bottlenecks, increased inflation and the resulting higher interest rates put consumers in a financial bind,” said Jason Laky, executive vice president and head of financial services at TransUnion.
Many people are therefore forced to make additional and higher monthly payments.
That’s not good for car sales. “That’s probably contributed to some consumers being hesitant about buying or leasing a new car,” Laky says.
There is also a risk that people will be denied a car loan – sometimes without good reason – because lenders raise the risk thresholds.
Subprime auto borrowers saw the largest increase in total monthly debt payments.
“With auto loan rates continuing to rise faster than incomes, this is putting pressure on consumers across all credit risk classes,” says Merchant.
Innovative method for assessing credit risk
He says lenders should continue to monitor this and advises them to consider further adjustments in risk assessment, possibly by using additional and trend-based data.
In “normal times,” it may be sufficient for auto lenders to regularly review their underwriting risk models for stability and accuracy.
In a more turbulent credit environment like the current one, “that may simply not be enough,” says Merchant. “Lenders should consider additional measures to make lending more confident and sustain growth.”
Such measures may include conducting retrospective and revenue loss analyses, tracking and monitoring performance across sample populations, and overlaying mixed scores to create dual-score strategies.
TransUnion has developed a conceptual risk assessment model that could complement the traditional models used by lenders to decide the creditworthiness of individual consumers.
The company’s software model is currently used for research purposes and is not for sale. But it does offer, among other things, a more detailed insight into payment behavior.
“We look more closely at how people manage their debt,” says Merchant. “For example, how have they paid off their credit card debt? Are they paying more each month than the credit card company requires, or are they consistently paying the minimum amount?”
Such a system would not replace existing risk management systems. “It would be like adding on to a house rather than building a new one,” says Merchant.
Some cautious financial institutions have scaled back their auto lending, resulting in some dealership customers’ loan applications being rejected – sometimes unnecessarily.
“Merchants would like to see risk management improved and used as a safe way to provide financing to their customers,” says Merchant. “Merchants see that their customers are affected by inflation. They would like to see lenders properly assess this using trend data and dual credit scoring.”
