By Ray Birch
ATLANTA—Expect new and used car prices to level off this year and then fall in 2024, a situation that’s good and bad news for credit unions, according to Equifax.
The end of the skyrocketing prices should bring even more buyers back to the market in ’24, driving new car sales above the 15-15.5 million projections the automotive industry has been sharing.
While that means more loans, there are concerns for loans already on the books—those made in the last one to two years for vehicles whose prices are inflated, Experian is suggesting.
With fast-growing negative equity already a concern in recent years, such a turn in prices could exacerbate the issue and lead to more defaults, according to the company.
If there is good news in that scenario it is that it has been high-FICO borrowers who have been willing to pay above market for their vehicles, while subprime borrowers have been paying much greater attention in the recent term to their credit rating, explained Lena Bourgeois, general manager, SVP, automotive and insurance, at Equifax.
A Frequent Question
“We get that question quite a bit,” Bourgeois told CUToday.info of the concerns by lenders that sharply declining values will lead to greater borrower defaults. “What we are seeing in our data is monthly loan payments for higher-end vehicles are on average $1,000 or more. I think the average monthly payment now for all cars is $720, well above the $400 average payment we saw about four years ago. So, that is a number that has almost doubled in the last four years, something we have not seen before.”
Bourgeois said the factors largely responsible for inflating car prices—poor inventory, limited number of lease returns and dealers charging above MSRP—are all waning, and in many cases reversing their pattern.
Lena Bourgeois
Strong Balance Sheets
Bourgeois said data also show those paying a high monthly payment due to the inflated MSRPs are largely high-FICO borrowers whose balance sheets and household budgets are in solid shape.
About 15% of all borrowers fall into that $1,000 monthly average payment range, Bourgeois said.
“These are people we believe may be spending more than what they would normally spend on a car due to inflated prices,” she said. “But what we are finding is this group is financially stable, and their delinquencies are a lot lower than normal. Therefore, we do not think that as car prices begin to fall this segment of borrowers is a big concern for defaults.”
A Reason to Relax
Meanwhile, there is an interesting trend with subprime borrowers that Bourgeois said should put lenders more at ease.
“The subprime segment is becoming way more savvy about protecting their credit,” Bourgeois said. “They already know they are at a disadvantage. What they're caring about now is making sure they're not putting themselves in a much more adverse position when they need a loan in the future. I think for those reasons we will not see defaults manifest themselves in a massive way.”
Some Lenders Pull Back
Bourgeois noted Equifax data show some lenders are pulling back now and tightening standards to reduce risk. While paying attention to growing risk is always good, Bourgeois said what lenders would be wise to also use alternative data to find good quality borrowers that FICO scores typically eliminate.
Bourgeois added credit unions have been slow to use alternative borrower data in their underwriting criteria, such as rent payments, utility payments, telecom payments etc.
“Lenders have had a very healthy couple years and now they're pulling back just because they're trying to reduce risk,” pointed out Bourgeois. “But I do think there's going to be an opportunity to optimize and maximize lending opportunities. That requires you be smart and use better data to make the best decisions for your portfolio—lending decisions on consumers.
“There's some great data that show that it pays off to not base decisions on just credit score—credit is just one viewpoint and we have utility information, telco information, alternative payday lending information…,” Bourgeois continued. “We have a database that expands the credit universe by almost an additional 100 million consumers.”
Extending Reach
Bourgeois said Equifax has seen lenders effectively extend their reach using that strategy.
“With a much deeper, broader set of information we’ve seen financial institutions lend effectively to the 620 and below FICO segment,” Bourgeois stated. “A lot of lenders are cutting that segment out altogether, and that's probably not the smartest thing, because like I said before, you know those are buyers that are working hard now to protect their credit. Using alternative data can improve your reach and your credit model without taking on more risk. It makes you more competitive.”