Auto Loan Credit Quality: Hazardous Road Conditions Ahead?
The gist of recent media coverage on the state of US auto lending can be summarized by the title of a recent New York Times article: As Auto Lending Rises, So Do Delinquencies. Wit…
The gist of recent media coverage on the state of US auto lending can be summarized by the title of a recent New York Times article: As Auto Lending Rises, So Do Delinquencies. With this concern in mind, FICO recently conducted a research study to examine the credit quality of US consumers with auto loans, as well as other significant credit trends in auto lending. Our findings tell an interesting tale:
- Banks have been mildly decreasing their car loan underwriting standards.
- Overall indebtedness for many consumers has been declining since the Great Recession.
- The size of car loans has been increasing faster than inflation since the recession.
- More consumers now have six-year auto loans instead of five-year loans, which were the previous standard.
- These six-year loans have higher delinquency rates, thus this shift to longer-term loans is likely to result in higher losses for US auto loans over the next few years.
As part of our study, we examined underwriting standards during the 2009-2016 timeframe by looking at FICO® Score distributions for consumers who opened new car loans in the prior six months. Because the movement of average FICO® Scores tends to be relatively limited over time, the best way to assess change in score distribution is to look at the fraction of consumers below a given score:
Examining the notable shifts in score distribution, we find that underwriting standards for auto loan consumers became looser after the recession, between 2009 and 2012. In other words, more lower-scoring consumers were given car loans during this timeframe. Since then, we have seen relatively little variance in the FICO® Score distribution until a dip in the most recent year. It will be interesting to see if this down-tick represents the beginning of a trend towards tighter underwriting standards.
Looking at consumer indebtedness, the story becomes a little more nuanced. The highest-scoring consumers have been taking on more debt since the recession, but the lowest-scoring consumers have seen their debt decline:
The largest driver for these trends is mortgages. As house prices increased since the recession (something I’ve discussed in a prior blog post), our study found that the highest-scoring consumers are taking larger mortgages:
Consequently, we see increasing debt for the highest-scoring consumers as they move into higher-priced homes. Since we are in a period of low interest rates, this does represent some increase in systemic risk to the extent that some of those loans have adjustable rates, thus consumer payments could increase. According to the Ellie Mae’s Origination Insight Report, adjustable-rate mortgages (ARMs) only represent about 4-5% of mortgage originations on a unit basis. ARMs are far more popular for larger loans in the US, accounting for roughly 30-40% of mortgage balances. Nevertheless, the potential risk impact that rising interest rates might have on auto loan consumers is likely quite limited.
Analysis of car loan balances is much more straightforward. Across all score ranges, consumers have been taking out progressively larger auto loans since the recession:
Looking at this chart, what’s eye catching is that consumers in the middle FICO® Score ranges are taking out somewhat larger car loans than higher-scoring consumers. One plausible explanation is that higher-scoring consumers can afford larger down payments, however we cannot confirm this hypothesis since bureau data does not include car prices, trade-in amounts or down payments. Another potential reason might be that these higher-scoring consumers opt more frequently for leases as opposed to loans. In any case, the difference between the average car loan amounts for consumers with FICO® Scores 620-719 and those with scores 800+ runs between $900 and $1,200.
Not only has the average car loan size increased, that increase has out-paced inflation over the last three years. The chart below compares the annual change in auto loan size to the change in the consumer price index:
So how are consumers affording these larger car loans? And what do delinquencies rates look like for these consumers? I’ll share those findings in my next post. Stay tuned to our blog!
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FICO® Score High Achievers: Is Age the Only Factor?
<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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