Consumers with lower credit scores are increasingly being pushed
out of the new-vehicle market by rising interest rates, leaving it
dominated by more credit-worthy households. Younger buyers’ market
share is also shrinking, according to analysis from S&P Global
Mobility.
“The market in general has moved in the direction of households
with greater financial resources,” said Tom Libby, associate
director of loyalty solutions and industry analysis at S&P
Global Mobility. “With rising interest rates, we’re seeing a
decline in the participation of the lower credit tier in the new
vehicle market.”
The average percentage rate (APR) for auto loans, not including
leases, dropped slightly in February compared to the previous
month, to 6.6%. The drop is not enough to impact the overall trend,
however. The APR has been above 6% since November 2022. As a
result, a growing segment of borrowers cannot access the
new-vehicle market.
Source: S&P Global Mobility- Catalyst for Insight with
TransUnion®
Note: All data filtered for new and loan
In February – the most recent data available – the average credit
score for a purchaser dropped 0.5 points compared to January to
744.8. But the average credit score has been rising for five years.
In February of 2017, it was 727.9, according to S&P Global
Catalyst for Insight with TransUnion®.
Source: S&P Global Mobility – Catalyst for Insight with
TransUnion®
Note: All data filtered for new and loan
Fewer and fewer borrowers with credit scores between 300 and 600
have been obtaining loans. In February of 2023, only 4.7% of
financed vehicle loans had a credit score of 600 or less, compared
to 9.2% in the same month in 2017.
Borrowers with credit scores in the 781 to 850 range, meanwhile,
accounted for 42% of auto loans in February of 2023, up from 37.4%
in February of 2017.
VantageScore® 4.0 risk ranges, calculated at origination
Subprime = 300-600, Near prime = 601-660, Prime = 661-720, Prime
plus = 721-780, Super prime = 781+
Source: S&P Global Mobility – Catalyst for Insight with
TransUnion®
Note: Originations are viewed one quarter in arrears to
account for reporting lag
The trend of consumers with lower credit scores being pushed out of
the auto loan market has coincided with a drop in younger buyers’
share of the new -vehicle market.
In February of 2023, the market share of buyers aged 18 to 34
fell 2.7 percentage points compared to the same month in 2022 – to
a five-year low of 10%.
That makes sense, because, “All things being equal, young buyers
will have fewer financial resources than older buyers,” Libby
said.
Source: S&P Global Mobility
Note: Registration Type: Retail (19)
As borrowers with lower-tier credit scores get pushed out of the
current market, it creates “white space” at the bottom, Libby said.
Automakers may see an opportunity to offer a lower-priced
model.
“As this market financially goes upstream and the lower credit
tiers are getting pushed out, does a dealer or brand want to appeal
to the market that right now is being shut out?” Libby said.
They will probably want to hold off. After all, in February the
average credit score and the APR came down slightly. Inventory is
improving, which should take pressure off prices and give consumers
more flexibility. “But we will have to wait for a few months to see
if it is a trend,” said Libby.
Much depends on what the Federal Reserve does regarding interest
rates. Since March 2022, the Fed has attempted to tame inflation
with a series of 10 rate hikes – rapidly pushing the Fed Funds rate
from 0.25% up to roughly 5.1% as of May 3, 2023. Although some
prognosticators believe a reversal could begin as soon as this
summer,
S&P Global Ratings believes the current rates will hold
until mid-2024.
“If the Fed does pull back,” Libby said, “We could see a swing
in these trends back the other way.”
This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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- Source: http://www.spglobal.com/mobility/en/research-analysis/lowercredit-buyers-pushed-out-of-new-vehicles-bad-news-for-you.html
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