Do Rising Delinquencies and Loan Balances Spell Bad News for Auto Industry?

By Markets Fool.com


Trucks and SUVs continue to push prices, and loan balances, higher. Image source: Ford Motor Company.

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As new vehicle sales are likely approaching their peak in the U.S. market, it doesn't take much for investors to get skittish on major automakers. That's part of the reason Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) have traded 12% and 6% lower year to date, respectively, despite posting record profits. Let's take a look at TransUnion's latest Industry Insights Report and see what loan balance figures and delinquency rates mean for the health of the auto industry.

Fast facts

Roughly 78 million consumers owned an automotive loan during the second-quarter, which is a 7% increase from the prior year. That shouldn't be surprising as new-vehicle sales remained strong during the first half of 2016 after first-quarter auto loan originations jumped 6.4% to 6.9 million, the highest level since 2009.

Another factor to consider is the loan balance level, which increased 2.7% during the second-quarter compared to the prior year, to $18,177. That's the highest level since the third quarter of 2009, according to TransUnion. It was also noticeably higher than the previous comparisons -- the second-quarter of 2013, 2014, and 2015 were $16,424, $17,127, and $17,699, respectively.

While rising loans and transaction prices give major automakers like Ford and GM more wiggle room to improve margins or increase incentives to lure in more consumers and grab market share, it means more consumers are in over their heads. The average 60-day delinquency rate increased 1% from the prior year to 1.11%. However, for the record, that's still a historically low delinquency rate. For context, delinquency rates over the prior comparisons from 2013, 2014, and 2015 were 0.95%, 1.09%, and 1%, respectively.

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"In recent years, the auto industry has experienced strong growth in truck and SUV sales, which we believe is one of the drivers for higher average auto balances," Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion said in the press release. "Strong economic fundamentals -- particularly low gas prices and rising employment -- are contributing to the continued growth in the auto sector."

What's it all mean?

Over the past few years, it's been incredibly easy for consumers to get their hands on cheap financing, which has helped fuel new vehicle sales in the U.S. market. At the same time, consumers have been demanding more high-tech interiors and infotainment systems, as well as larger more expensive vehicles, such as SUVs.

Because of those factors, among others, the average price of vehicles has moved higher and consumers have responded by extending the length of their auto loans out further and further. That could slow down the consumer purchase cycle, which would be bad news for automakers and their investors. In fact, according to Experian, the average term for an auto loan is now 68 months, which is the longest average term ever recorded by the company.

Sure, rising loan balances have been accompanied by a slightly higher delinquency rate, but ultimately these figures show that the automotive industry still has some momentum, despite peak-auto sales concerns. As long as employment continues to improve and wages increase consistently, the automotive industry is poised to maintain annual sales near the top of the cycle, rather than spiral downward -- and that's good news for investors within any corner of the auto industry.

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Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.