Following a record-breaking year of sales, driven mostly by a stronger domestic economy, expanded access to credit and very low petrol prices, the US auto market ploughed full steam ahead into 2016. Bridget McCrea analyses the key trends and looks ahead to see what could be coming in 2017

The year 2016 will go down as the year of several ‘firsts’ for the US auto finance market, with active auto loans hitting the $1trn (£7.62bn) mark for the first time ever, popular ride-sharing service Uber getting into auto leasing, and auto manufacturers experimenting with new technologies and concepts that could drastically transform the motor vehicle.

At the same time, financing companies continued to push loan terms up to 84 months and beyond, the fully autonomous car came into clearer view, and subprime auto loan volume – loans to borrowers with credit scores in the 300-600 range – experienced double-digit growth during the first quarter of the year.

Breaking auto finance records

According to Autodata Corp, dealers sold 17.47 million vehicles in 2015 and average transaction prices reached a record $34,428 (£26,230).

To finance those deals, US consumers are borrowing more money.

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According to Experian Automotive’s most recent State of the Automotive Finance Market report, the total balance of active automotive loans increased 11.1% during the first quarter of 2016 – up from $905bn during the same period in 2015 – and effectively pushed the automotive loan needle past the $1trn mark for the first time in history.

“We saw some all-time highs for the first quarter,” says Melinda Zabritski, senior director, financial solutions at Experian Automotive.

She also notes that while subprime loan volumes experienced double-digit growth, overall loan delinquencies remained low during the first few months.

However, she warns that the high volume of subprime loans could present challenges for lenders at some point.

“With more consumers relying on financing,” she says, “lenders should monitor credit and delinquency trends in order to adjust strategies accordingly.”

According to Zabritski, auto leasing remains a “prime” product – used by consumers with credit scores in the 600-850 range – with over 36.3% of prime borrowers opting to lease.

“Leasing currently surpasses 30% of all new consumer vehicles sales,” she says, “as consumers across all risk tiers increasingly choose to lease.”

Zabritski expects extended loan terms – to 84-plus months in some cases – to continue as both loan amounts and payments reach ‘all-time highs’ in 2016.

Non-traditional lenders join the game

Ten years ago the typical US citizen would never have dreamed of using a mobile phone to hail a ride from a complete stranger, but a pair of enterprising mobile application developers changed that mindset in 2009, and then took their Uber concept out to an international audience three years later.

This year, to help get more ride-sharing drivers on the road, San Francisco-based Uber Technologies began offering short-term leases through a wholly owned subsidiary called Xchange Leasing.

For the programme, Uber partners with auto dealerships, advertises to drivers, manages risk, and even pays ‘repo men’ – individuals tasked with repossessing cars that their owners do not pay for – to retrieve vehicles from drivers who have fallen behind on their payments.

According to Bloomberg’s Inside Uber’s Auto-Lease Machine, Where Almost Anyone Can Get a Car, the ride-sharing company expects its financing and discount programmes – including Xchange – to put more than 100,000 drivers on the road this year.

Expect to see more non-traditional companies following in Uber’s footsteps and finding ways to provide new levels of customer service.

In fact, Mike Rogers, director of business development at financial technology firm ACI Worldwide in San Francisco, sees significant opportunity in the auto finance space for lenders that go above and beyond on the customer service front.

“Marketplace lenders, for example, come into the industry with a whole different approach to the customer relationship,” says Rogers, who points to peer-to-peer lending and crowdfunding as two additional emerging sources of auto financing.

“These lenders are coming at the business from different angle, which to some degree will be healthy for the marketplace.

“Anything that opens up access to credit is a good thing, as long as it’s managed [well] from a risk standpoint.”

Mobile-enabled loans and payments

The days when a consumer had to wait patiently for hours for a dealer’s finance manager to review the numbers and come up with a workable deal – and then physically sign all of the related paperwork before driving off the lot in his or her new car – are numbered, if not already history in some cases.

In catering to the US’s 75.4 million millennials, many of whom have been using mobile phones since childhood, loan servicers are coming up with new ways to speed up both the financing and payment processes.

“The extended automotive industry is undergoing a profound and disruptive transformation, propelling the emergence of a new mobility ecosystem,” Deloitte states in Financing the Future of Mobility.

“As an indispensable player in the industry, auto finance companies will also need to transform their business models to align with the new sources of growth and value creation.”

Credit the millennials with speeding up those levels of growth and value creation within the industry.

“Millennials want faster payments and lower costs,” Rogers says.

“They want to be able to use their phones not only to look for cars, but to handle the end-to-end purchase process.”
Put simply, these younger car buyers want to be able to find a car, secure a loan, and then pay for the loan over time using their mobile devices.

To fulfil the latter, Rogers says lenders will need to optimise their loan-servicing solutions for mobile.

“Ultimately, that’s going to be a big part of customer satisfaction,” he adds.

Asked how the auto finance industry as a whole is progressing on the mobile front, Rogers says the sector is “very average” compared to others.

“The auto industry is plodding along in the right direction, but overall it’s very average as it relates to [payment presentation] relative to wireless companies, cable companies, and even the card issuers,” says Rogers, “all of which do a better job in that area.”

Loan terms extend to new levels

Anyone buying a car in the US this year may be surprised at the lengthy loan terms laid out in front of them on the negotiating table.

Where car loans typically fell into the 30 to 60-month range, they are now extending out to 84 months and beyond.
In an attempt to get more consumers behind the wheel of both new and used cars, financing companies have taken to extending loans well beyond what would be considered the norm in the US.

At the time of going to press, average auto loan terms for new cars had reached an historic high of 68 months. This trend presents both opportunities and potential challenges for the auto financing market, where too many consumers being ‘upside side’ on their loans – where over time they wind up owing more than the vehicle is worth – could spell trouble for the market as a whole.

“If you bought a three-year-old car, and took out an 84-month loan, it would be 10 years old when the loan was finally paid off,” writes NerdWallet’s Philip Reed.

“When you sign up for an 84-month-long auto loan, building up equity in the vehicle takes a very long time,” says Tom Kontos, executive vice-president and chief economist at ADESA Analytical Services in Carmel, Indiana.

“Then, if you get into a situation where used car prices are suppressed, consumers will be upside-down for even longer durations. That level of risk-to-collateral is definitely giving the folks who monitor the auto finance space cause for concern.”

Those same industry overseers are concerned about the high levels of subprime financing taking place within the US auto sector right now, where Experian says the loans and leases extended to borrowers with sub-600 credit scores comprised 18.79% of the market during the first quarter of the year.

Kontos says he is yet to see any real signs of that sector – and the growth in subprime lending – negatively impacting the auto lending market in the US as a whole.

“I’m not that concerned about this trend, not that auto lenders shouldn’t be cautious about it and monitoring it,” says Kontos.

“Overall, the credit quality is still pretty good. Even if used car market values softened, I still don’t think the subprime market would create any kind of an issue.”

The autonomous car comes into view

While auto makers, dealers and financing firms alike continue to ride the wave of healthy sales and high demand, manufacturers have been spending more time in the lab experimenting with new technologies and concepts with one common goal: to be first to market with a fully autonomous car.

In August, for example, Ford threw down the gauntlet when chief executive officer Mark Fields announced that the company is working toward launching a fleet of commercial, level-four – one level below a completely autonomous system, in which drivers do not have to be engaged – vehicles in a ride-hail service by 2021, according to various media reports.

To get there, Ford is investing in Velodyne, a self-driving tech company, and working with three other start-ups.  

In its 2016 Auto Industry Trends report, PwC says these and other breakthroughs have the potential to “transform the automobile (and transportation more broadly) in perhaps the most dramatic fashion since Ford rolled out the Model T.”

An obvious precursor to the autonomous vehicle, PwC notes that the intelligent car – one equipped with self-braking, self-parking, and automatic cruise control based on road conditions – is already giving drivers a first taste of the experience of relinquishing control of a vehicle.

“The idea of fully autonomous vehicles is too futuristic for much of the driving public to embrace right now,” PwC reports, “but for auto makers, the path from current models to driverless cars is going to be an exciting period of transformation.

“These new developments represent enormous opportunities even as they augur a perilous, unsteady phase for the industry.”

A peek into the crystal ball

As the US auto industry undergoes transformation on several different levels – from mobility to intelligent vehicle technology to non-traditional lending options – manufacturers and dealers continue to sell high volumes of both new and pre-owned vehicles to borrowers across both the prime and subprime categories.

While a repeat of 2015’s sales levels may or may not happen, the individuals interviewed by Motor Finance expect continued positive momentum for the industry throughout the rest of 2016 and into 2017.

“US markets are peaking at historic levels, setting a sales record of just under 17.5 million vehicles in 2015, up 5.7% from the year before and topping the high-water mark of 17.4 million in 2000,” PwC reports.

It continues: “US sales are likely to be relatively flat in the next two years, and may face a moderate downturn in 2018, the victim of economic cycles, higher auto loan interest rates as the Federal Reserve raises overnight rates, and an expected flood of vehicles into the used car market.”