SCHAUMBURG, Ill. -

Experian senior director of automotive financial solutions Melinda Zabritski made a suggestion to finance companies after Experian released its Q3 2020 State of the Automotive Finance Market report on Thursday.

The recommendation came in connection with a metric that providers might already watch with a laser focus — delinquencies — even as the subprime segment continues to shrink to a new low.

According to the report, 30- and 60-day delinquency rates improved in the third quarter, coming in at 1.56% and 0.51%, respectively.

Comparatively, a year ago, Experian reported the 30-day delinquency rate stood at 2.25% and the 60-day delinquency rate sat at 0.75%.

“While the decline in 30- and 60-day delinquency rates is a positive trend for the industry, particularly with some of the accommodation programs coming to an end, we do need to consider the impact these programs have had on consumers,” Zabritski said in a news release.

“Some consumers likely leveraged financial assistance programs to manage through hardship, so it’s important for lenders to keep a close eye on how delinquency rates evolve over the coming quarters,” she continued. “Nonetheless, the improvement is a positive sign for the country’s economic recovery.”

Overall, the industry is taking on less risk as Experian pegged the subprime segment of all financing at 19.23% in the third quarter, representing a record low in its database.

And in Q3, analysts added that deep subprime financing remained below 3% of the overall market.

Beyond influencing consumers’ ability to manage monthly payments and perhaps how much appetite finance companies have for subprime, Experian pointed out the pandemic also has impacted overall volume.

However, despite fewer vehicle sales, analysts discovered outstanding balances still grew 2.8% from a year ago, reaching $1.2 trillion. This increases also comes at a time where a smaller percentage of vehicles are being financed.

Experian indicated the percentage of new vehicles with financing was 82.43% in Q3 compared to 86.99% the previous year. Similarly, the percentage of used vehicles with financing was 33.71% in Q3 compared with 39.79% over the same period.

“It is important to note, the drop in the percentage of vehicles with financing can also be attributed to an increase in cash transactions,” Experian said.

Prime consumers continue to opt for used vehicles

During the first few months of the pandemic, Experian recapped that automakers offered new-vehicle incentives to improve sales. As a result, analysts saw prime borrowers opt for new vehicles, reversing a trend they observed in previous quarters.

With fewer incentives offered during the third quarter, Experian found that a higher percentage of prime consumers shifted back to used.

In fact, analysts reported prime and super prime contract holders made up 55.3% of used vehicles financed during the quarter, a new high for used-vehicle financing.

Experian sees the shift back to the used vehicle market is likely driven by continued affordability conversations; a metric that Cox Automotive and Moody’s Analytics recently chose to track more closely.

The newest Experian report showed both the average amounts financed for both new and used vehicles increased in Q3.

The average amount financed for a new vehicle rose more than $2,000 over the previous year, reaching $34,635, while the average amount financed for a used vehicle climbed $945 to $21,438 over the same period.

Analysts explained the increases could also be attributed to consumer preference, with buyers leaning toward larger, more expensive vehicles.

Experian noted that small SUVs were the most purchased vehicles, making up 26.01% of contracts in Q3, followed by midsize SUVs at 24.15%.

Despite the increases in average amounts finance, Experian mentioned the increases in average monthly payment weren’t as sharp.

To be exact, analysts said the average new-vehicle payment amount increased $11 year-over-year, reaching $563 in Q3. The average used-vehicle payment ticked up $6 to $397.

To keep those monthly payment manageable, finance companies are absorbing more risk by stretching terms and edging rates lower.

Experian determined the average term for new vehicles financed during the third quarter increased slightly to 69.68 months, up from 68.98 months a year earlier. And the average term for used vehicles financed in Q3 increased from 64.49 months to 65.15 months.

Analysts went on to note that the average interest rate for a new-vehicle contract booked in Q3 saw sharp decrease, sliding from 5.38% in Q3 of last year to 4.22% in Q3 of this year. The average interest rate for used-vehicle paper originated in Q3 dropped from 9.09% to 8.43% year-over-year.

“With affordability still top of mind, particularly during the pandemic, lower interest rates have certainly helped consumers keep monthly payments at a manageable level,” Zabritski said.

“As the market evolves and financial situations shift, it’s important for lenders and dealers to stay close to the trends and make strategic decisions that help keep the industry moving forward and consumers in their vehicles.”

Additional findings for Q3

Experian closed its latest update by mentioning a trio of other trends, including:

• Average credit scores saw a sharp increase for new vehicles, jumping from 728 in Q3 2019 to 732 in Q3 2020. The average credit score for used vehicles also saw a one-point increase from 664 to 665 year-over-year.

• New-vehicle leasing continued decrease in Q3 2020, comprising 26.2% of new-vehicle financing, compared to 30.27% in Q3 2019.

• Captive finance companies continued to increase market share, rising from 30.85% in Q3 2019 to 34.49% in Q3 2020. The buy-here, pay-here segment saw a slight increase from 4.32% to 4.69%, while all other provider categories sustained year-over-year decreases.

To view the entire Q3 2020 State of the Automotive Finance Market report webinar, go to this website.