As Consumers’ Monthly Debt Loads Increase, Auto Lenders Must Adapt to Manage Risk, Increase Originations
A new TransUnion (NYSE: TRU) study reveals that consumer affordability challenges and tightened lending standards are affecting new vehicle originations in the auto industry. The study, 'Originating Auto Loans With Confidence,' examines trends in auto originations, consumer savings, debt burdens, and credit scores during the pandemic and surrounding years. Despite a brief post-lockdown recovery in 2021, auto originations have declined year-over-year due to supply shortages and now, affordability issues and tighter consumer budgets. Notably, the average monthly debt for consumers with auto loans has increased by nearly 20% over the past two years, with monthly payments rising from $1,345 in Q1 2022 to $1,583 in Q1 2024. This increase is almost double the Consumer Price Index (CPI) growth over the same period. Delinquencies among auto borrowers are also up, with 60+ day delinquencies rising to 1.33% in Q1 2024 from 1.19% a year earlier. Consumers with significant credit score increases in 2022 are at greater risk of delinquencies. Lenders are encouraged to adapt their strategies to manage risk and stimulate originations, including using alternative data and conducting performance analyses.
- The average monthly debt for consumers with auto loans increased by nearly 20% over the past two years, reflecting a rise in loan volumes.
- Auto borrowers' monthly payments rose from $1,345 in Q1 2022 to $1,583 in Q1 2024, indicating increased consumer spending.
- Auto originations have seen consistent year-over-year declines due to consumer affordability challenges and tighter lending restraints.
- Delinquencies among auto borrowers have increased, with 60+ day delinquencies rising to 1.33% in Q1 2024 from 1.19% in Q1 2023, indicating financial strain on consumers.
- Consumers with significant credit score increases in 2022 are more likely to experience delinquencies, impacting lender risk.
Insights
The TransUnion study sheds light on significant data that holds critical implications for auto lenders and investors alike. One of the key highlights is the 20% increase in average monthly debt payments for consumers with auto loans over the past two years. This rapid rise in debt payments is almost double the Consumer Price Index (CPI) growth for the same period, indicating that the cost burden on consumers is growing at an unsustainable pace.
From an investor's perspective, this trend suggests potential headwinds for auto lenders. For one, the rising debt levels and increased delinquencies (up to
Additionally, the drop in auto originations shows a direct impact on revenue streams. Lenders might need to consider adopting innovative credit models to maintain growth. By using alternative data and dual score strategies, they can better assess risk and potentially stimulate lending in a more controlled manner. However, this would require investment in new technologies and methodologies, which might not be immediately profitable.
In the short term, auto lenders might face profitability pressure, but those that can adapt their risk assessment strategies effectively might find themselves better positioned for long-term growth.
The study highlights a broader trend impacting both the auto market and consumer behavior. The findings underscore the fact that while auto inventories have stabilized post-pandemic, the primary issues now are affordability and higher monthly debt burdens. This pivot from supply chain issues to economic affordability challenges is important for understanding consumer behavior in the auto market.
For retail investors, it is essential to recognize that the auto industry is now facing a different kind of challenge. The fact that average monthly debt payments for auto borrowers have risen significantly reflects broader economic pressures, such as inflation and wage stagnation. These factors are likely to continue influencing consumer decisions and could suppress demand for new vehicles, potentially leading to prolonged declines in auto originations.
Furthermore, the rise in delinquencies among auto borrowers, particularly among those with below prime credit, suggests that lender strategies must evolve. Lenders focusing on improving risk models and leveraging alternative data might better navigate these economic headwinds, but the overall consumer financial health remains a critical concern. Investors should keep a close eye on these trends as they can significantly impact the auto sector's financial health and stock performance.
In the long term, the ability of auto lenders to adapt and utilize advanced credit models will be pivotal. This adaptation will not only help in managing risks better but could also foster consumer confidence, thereby stabilizing the market.
New TransUnion study finds consumer budgets stretched increasingly thin, affecting payment performance for some
CHICAGO, June 27, 2024 (GLOBE NEWSWIRE) -- A new TransUnion (NYSE: TRU) study released today found that consumer affordability challenges and tighter lending restraints are impacting new vehicle originations across the auto industry.
The study, Originating Auto Loans With Confidence, explored trends in auto originations, consumer savings, debt burdens and credit scores in the pandemic era, as well as in the years before and after. The study also looked at consumer performance in the auto market, particularly at a time when overall consumer performance is beginning to see some measure of deterioration. In addition, the study explored potentially valuable credit models that may offer lenders an opportunity to increase slumping originations in a risk-appropriate manner.
With the exception of a brief post-lockdown spike in 2021, auto lenders have seen consistent year-over-year (YoY) declines in auto originations in the quarters since the start of the pandemic period. Supply shortages fueled these declines in 2021 and 2022. However, as inventories have normalized, affordability and increasingly squeezed consumer budgets have now become the driving factors in a continued sluggish auto origination market.
“Just as auto inventories began to recover from the worst of the pandemic era supply chain shortages, elevated inflation and higher interest rates that followed have put consumers in a tight financial bind,” said Jason Laky, executive vice president and head of financial services at TransUnion. “As a result, many have been taking on additional and larger monthly payments each month to service higher debt levels. This has likely contributed to some consumers holding off on buying or leasing a new auto.”
When examining the current monthly debt burden of consumers with auto loans, the study found that the average monthly debt for those consumers increased by nearly
Total Monthly Credit Debt Payments Among Auto Borrowers Have Been Steadily Increasing
| Q1 2018 | Q1 2019 | Q1 2020 | Q1 2021 | Q1 2022 | Q1 2023 | Q1 2024 | |
| Auto | |||||||
| Mortgage | |||||||
| Bankcard | |||||||
| Personal Loan | |||||||
| Total |
Source: TransUnion Consumer Credit Database
Delinquencies Tick Up Among Auto Borrowers
The study also found that delinquencies are on the rise among auto borrowers. This is likely in no small part due to the increased debt load mentioned above, along with the broad effects of inflation. Auto delinquencies 60 or more days past due (60+ DPD) increased to
Among Q3 2022 originations, those consumers who were high migrators, or saw significant score increases, in the period prior to their origination were significantly more likely to fall 60+ DPD in that 15-month period following. Among that group,
“As we are continuing to see auto payments steadily increasing faster than incomes, this is placing pressure on consumers across the credit risk ranges when controlled for risk tier, but in particular, among consumers with below prime credit,” said Satyan Merchant, senior vice president of auto and mortgage line of business leader at TransUnion. “This is something that bears continued monitoring by lenders, and those lenders should consider making further adjustments, potentially through the use of alternative and trended data, as necessary.”
Merchant continued, “While in normal times it may suffice for auto lenders to continually monitor their underwriting risk models for stability and accuracy, in a more unsettled lending environment, such as that in which we find ourselves today, that may simply not be enough. Lenders should consider additional measures to stimulate originations more confidently and maintain growth. These measures can include conducting retrospective and lost sales analyses, tracking and monitoring performance across sample populations, and overlaying blended scores to create dual score strategies.”
To learn more about how TransUnion TruVision attributes and alternative data can help lenders rebuild underwriting and strategies, click here.
About TransUnion (NYSE: TRU)
TransUnion is a global information and insights company with over 13,000 associates operating in more than 30 countries. We make trust possible by ensuring each person is reliably represented in the marketplace. We do this with a Tru™ picture of each person: an actionable view of consumers, stewarded with care. Through our acquisitions and technology investments we have developed innovative solutions that extend beyond our strong foundation in core credit into areas such as marketing, fraud, risk and advanced analytics. As a result, consumers and businesses can transact with confidence and achieve great things. We call this Information for Good® — and it leads to economic opportunity, great experiences and personal empowerment for millions of people around the world.
http://www.transunion.com/business
1 High Migrators: score change >= 46 pts, measured 27mo and 3mo before origination;
Low Migrators: score change between -20 and +45 pts, measured 27mo and 3mo before origination;
Negative Migrators: score change of <= -21 pts, measured 27mo and 3mo before origination.
| Contact | Dave Blumberg TransUnion |
| dblumberg@transunion.com | |
| Telephone | 312-972-6646 |
FAQ
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