Why automakers are poised for a terrific 2021, according to an Experian credit expert

  • Experian recently published a report on the state of the auto-lending .
  • Despite concerns that the US market would collapse in early 2020 as the COVID-19 pandemic raged, the industry has held up surprisingly well.
  • According to Experian, overall credit quality has increased and subprime lending has dropped off.
  • Visit Business Insider’s homepage more stories.

As 2019 drew to a close, the auto industry anticipated a good 2020. Maybe not a record year for US sales, but a strong economy, full employment, low interest rates, and furious competition meant there was every chance that customers would take home another 17 million cars, trucks, and SUVs, extending a boom that began in 2015.

Then the COVID-19 pandemic hit, and with the industry shutting down manufacturing in March and April, all bets were off. The carmakers were struggling to make cars, and their dealers were struggling to figure out how to sell them. In March and April, sales slid 37% and 44%, respectively.

On the year, though, the market held up remarkably well. TrueCar, a consumer auto website, predicted that 16.2 million vehicles would be sold for the year, just a 4.4% decline from 2019. 

Consumers still to buy cars, and lenders still want them to borrow money

Credit makes the world of both new and used cars go round, and according to Melinda Zabritski, Senior Director of Automotive Financial Solutions at Experian, lending closed out 2020 with no major red flags.

“People keep on wanting to have some kind of downturn,” she said when asked about the refrain of worry that has periodically gripped the car business, as the current boom has persisted. 

But the pandemic didn’t meaningfully change the availability of credit, she added. 

“Lenders have funds,” she said. “And we don’t expect to see have any limitations on funds.”

Borrowers have also become more creditworthy, undermining concerns that stressed consumers would default in greater numbers, particularly at the so-called “subprime” and “deep subprime” levels. (Experian defines five credit categories by Vantage score: super-prime at 781-850; prime at 661-780; non-prime at 601-660; subprime at 501-600; and deep subprime at 300-500.

“Prime represents a larger and larger piece of financing,” Zabritski said. “The credit score in each tier is increasing.”

Paralleling that trend, she noted, the percentage of loans defined as subprime fell, and loan delinquencies didn’t notably increase. 

A combination of government stimulus and offers from automakers and their captive-lending arms to defer loan and lease payments probably helped the overall situation.

“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,” Zabritski said in a summary of Experian’s “State of the Automotive Finance Market” report for the third quarter.

2020 was a big year for used cars

An interesting wrinkle to the 2020 market was the popularity of used vehicles, coupled with a decline in leasing caused by the manufacturers’ shutdowns.

Zabritski said used-car sales were a “common theme among dealers,” noting that with no new vehicles coming off the assembly lines for several months, their lots weren’t full. 

Typically, new-car buyers are prime borrowers, but they gravitated toward used vehicles in 2020. That translated into prime and super-prime customers making up more than 55% of the used market, an all-time high, Zabritski said.

The market collapse that the industry feared in the spring didn’t materialize, and total loan volumes actually grew to $1.2 trillion, despite lower sales. But at least one expectation came to pass: Small and midsize SUVs amounted to more than half of total sales through the third quarter, with sedans falling to less than 20%.

And that trend, ongoing now for several years, coincided with the growth of high-creditworthiness for borrowing. 

“The Toyota RAV4 was the number-one vehicle for prime,” Zabritski said.

For a closer look at Experian’s data, the company shared the charts below with Insider:

The overall quality of borrowers' credit increased in 2020.

In fact, according to Experian, much of the lending market is now characterized by prime credit scores, defined as better than 661 on the Vantage scale.

Deep subprime is the realm of low credit scores and high interest rates. Lenders expect more defaults at this tier. But it now makes up a small percentage of the market.

In general, subprime lending fell off in 2020.

Experian noted that credit scores are also on the rise. A score translates into less interest paid over the life of a loan and qualifies the buyer or lessee for more favorable terms.

Delinquencies were an immediate concern when the COVID-19 pandemic hit, but government support has helped borrowed stay current on their payments.

Borrowers are taking out longer-term loans, but that isn't adding risk at any level of credit.

Used vehicles became popular in 2020, as the pandemic-related shutdowns reduced the supply of new vehicles.

Small and mid-size SUVs continued to dominate the US market as sedans retreated.


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