TransUnion Report: Consumers Now with Negative Equity, As Loan-to-Value Ratios Rise, And Used Vehicle Values Fall

A newly released TransUnion and J.D. Power study shows that while most remain in positive equity positions, potential risk is “increasing among some consumers and lenders.”

A return to a vehicle environment “closer to the pre-pandemic norm has allowed for inventories to replenish and for vehicle values to stabilize.”

According to a TransUnion (NYSE: TRU) and J.D. Power study, “this normalization of the market has put many recent borrowers in a far less advantageous equity position, posing some payment risks.”

The study, “Impact of Unsettled Vehicle Values on Lenders and Consumers,” found that “as a result of well-established supply and inventory challenges early in and throughout much of the pandemic, vehicle values increased dramatically, in particular in the used vehicle market.”

As a result, many consumers “secured loans with relatively high monthly payments.”

As vehicle values have “declined in recent quarters, used car loan-to-value ratios (LTVs) at origination have trended in the wrong direction for consumers.”

Originating LTVs in Q1 2023 averaged 125 up from 110 in Q1 2022 and 104 two years prior. LTVs measure “the difference between the loan amount and the market value of the auto. A lower LTV generally means a borrower has more equity in their auto loan.”

This means that “while the majority of consumers will find themselves with positive equity, there are some in more challenging spots.”

To a large extent, used vehicle values “were elevated as a result of the scarcity brought on by pandemic-related supply chain and inventory issues. As those issues have abated, and inventories have begun to return to more of a normal state, the value of those used vehicles have begun to decline.”

The study also showed “that rising LTVs are important to take note of as they may be a future arbiter of higher delinquencies among used auto finance customers.”

While higher LTVs at origination were more indicative of “a rising delinquency rate, a similar trend appeared to take hold among borrowers who saw their equity position worsen and their LTV increase even after origination and during the life of the loan.”

For instance, the study “examined one cohort of subprime borrowers who originated used auto loans in Q1 2020, the vast majority of whom saw a 140 or higher LTV at origination.”

The study found “that among those in that cohort whose LTVs declined over the next 24 months, the risk of delinquency declined as well.”

In fact, among those whose LTVs had “dropped to less than 100 by Q4 2022, their risk of 60+ days past due delinquency was about one-quarter that of a subprime borrower with an LTV that remained at 140 or higher.”

Ultimately, the study found “that equity and depreciation are key factors in future performance, as consumers with more vehicle equity appear more likely to protect that equity by making payments.”

This stands in contrast “to those borrowers with faster depreciating vehicles, and therefore flat to rising LTVs post origination, who were more likely to go delinquent.”

Satyan Merchant from TransUnion said:

“Vehicle financing continues to evolve as the market emerges from pandemic-related disruptions. While many lenders and consumers have benefited from elevated vehicle values and lower delinquencies during the pandemic, vehicle values are expected to decline. Given the possibility that accelerated depreciation will result in negative existing LTVs for longer periods, this will be especially important for lenders to monitor. Lenders would be best served to utilize the necessary tools and resources, such as trended and alternative data at underwriting, to successfully optimize each phase of the vehicle financing lifecycle.”

Merchant continued:

“As vehicle prices have risen and overall inflation remains elevated, consumers are increasingly starting in higher than average LTV positions to afford used vehicles. It’s more important than ever for consumers to effectively manage their payments to fit within their budgets while also allowing for a cushion for other ongoing expenses like insurance and repairs.”

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