TransUnion: Delinquencies continue on normalization path

While TransUnion spotted noticeable rises of consumer debt levels in many credit segments, experts also are seeing normalization of delinquencies.

That’s the main theme of TransUnion’s Q2 2022 Quarterly Credit Industry Insights Report (CIIR) released on Thursday.

“Consumers are facing several challenges that are impacting their finances on a day-to-day basis, namely high inflation and rising interest rates. These challenges, though, are happening against a backdrop where employment opportunities are still plentiful and jobless levels remain low. We see lenders offering more access to credit to non-prime consumers, some of whom are new to credit,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.

“This is a welcome development as more consumers have gained access to credit during a time when high inflation has placed a greater burden on their wallets. While delinquencies generally rise after a period when more non-prime borrowers secure loans, the rates of delinquency remain mostly at or below pre-pandemic levels, particularly for cards and personal loans,” Raneri continued in a news release.

Vintages vary in auto

Narrowing the focus just on auto financing, TransUnion discovered serious delinquencies — contracts 60 days or more past due — increased 40 basis points year-over-year during the second quarter.

However, experts pointed out that performance differs for recent vintages.

For instance, TransUnion indicated that paper originated in Q2 and Q3 2020 continue to outperform pre-pandemic vintages, while contracts from Q2 and Q3 2021 are beginning to perform on par with them.

Experts said originations in Q1 2021 declined 8.3% from the previous year, though they remain above Q1 2019 levels.

TransUnion also mentioned the cost to finance vehicles remains high, as witnessed by a more than $2,000 year-over-year increase in average auto amount financed per consumer in Q2.

Satyan Merchant, senior vice president and automotive business leader at TransUnion, noted that used vehicles are helping propel the debt metric, with average used vehicle monthly payments rising 22% on a year-over-year basis to $505 in Q1 2022.

“Supply chain challenges continue to impact the auto finance market with affordability eroding for many consumers,” Merchant said in the news release. “There’s a clear trend in rising monthly payments for both new and used vehicles, which have also been driven higher by the Federal Reserve’s recent rate hikes.

“Increased costs to consumers may be seen as an opportunity for some lenders with credit unions gaining market share, possibly because they are often able to offer lower interest rates to auto loan borrowers,” he continued. “Affordability challengers are likely causing a rise in serious auto loan delinquency rates, though performance is not uniform for recent vintage loans.”

Q2 2022 Auto Loan Trends

*Note: Originations are viewed one quarter in arrears to account for reporting lag. **Data from S&P Global MobilityAutoCreditInsight, viewed one quarter in arrears.

Source: TransUnion

Personal loan balances hit record

TransUnion reported total personal loan balances reached a record $192 billion in Q2, marking a 31% increase from last year.

Experts also indicated total balances nearly doubled for subprime borrowers (up 92%) while more modestly increasing — by 10% — for super prime borrowers.

TransUnion explained that originations in Q1 2022 (viewed one quarter in arrears) grew nearly 60% year-over-year to reach 5 million, with all credit risk tiers experiencing at least 20% growth from the previous year. The credit bureau found that subprime borrowers saw the largest rise in originations at 71%.

As subprime borrowers take a larger share of personal loan accounts, TransUnion acknowledged that serious borrower delinquency rates — payments more than 60 days past due — now have risen in four straight quarters.

Liz Pagel, senior vice president and consumer lending business leader at TransUnion, noted that the Q2 reading of 3.37% is up 47% from last year, though it remains near the levels seen prior to the pandemic.

“The recent record growth in unsecured personal lending is partly due to lenders’ expansion into below prime risk tiers in the first half of 2022,” Pagel said in the news release.

“As expected, increased lending to these risk tiers drove increased overall delinquency rates, but serious delinquencies still remain near pre-pandemic levels. As lenders look to continue to grow, a shift to more prime and above consumers is possible as demand is expected to continue due to rising costs from inflation,” she added.

Other credit observations

TransUnion made another observation about the credit market.

In another sign that the consumer credit markets are performing relatively well, TransUnion’s Credit Industry Indicator (CII) increased to 119 in Q2. up from 116 in the previous quarter and at the same level as it was in Q2 2021.

TransUnion highlighted the CII is a quarterly measure of depersonalized and aggregated consumer credit health trends that summarizes movements in credit demand, credit supply, consumer credit behaviors and credit performance metrics over time into a single indicator. Examples of data elements categorized into these four pillars include: new product openings, consumer credit scores, outstanding balances, payment behaviors, and more than 100 other variables.

Experts explained rising levels for the CII generally indicate an improvement in the overall health of the consumer credit market.

“The stable CII level in Q2 2022 compared to the prior year period was due to the increases in credit demand and supply, as consumers increased their applications for and originations of credit products, particularly cards and personal loans, over the past year, somewhat offset by rising year-over-year delinquencies from the extremely low levels seen in Q2 2021,” TransUnion said.