Why more late payments on auto loans are actually a good thing

(Photo: Joel Kramer | Flickr)Believe it or not it’s a good sign for auto sales that Experian Automotive, a unit of the Experian credit bureau, reported recently that the percentage of auto loans delinquent by 60 days or more increased in the fourth quarter of 2012, for the first time in three years.

That’s a good thing because it’s a sign that auto lenders have somewhat relaxed their approval standards, especially for subprime loans. That makes auto loans easier to get, which greases the skids for more U.S. auto sales.

To put the numbers in context, Experian Automotive said 60-day-plus delinquencies accounted for only 0.74 percent of total outstanding auto loans in the fourth quarter of 2012. That was an increase of only 2 basis points from 0.72 percent in the fourth quarter of 2011. It was also the first time 60-day delinquencies increased year-over-year since the fourth quarter of 2009, Experian said.

Sixty-day delinquencies are significant because that’s the point beyond which a loan is likely to be written off.

Unlike other consumer segments, auto loans — even subprime auto loans — performed as expected during the last recession. Mortgages cratered, especially subprime mortgages.

Sure, delinquencies increased on auto loans in the recession. Auto lenders responded by tightening up standards or in some extreme cases bailing out of auto lending entirely. Several big regional banks retreated from making auto loans outside their home territories. During the worst of the credit crisis, auto lenders themselves had trouble borrowing money with which to make additional loans.

But as the economy improved and consumer demand rebounded, auto lending came back, too. Prime-risk borrowers, who never had as much difficulty getting a loan as subprime buyers, haven’t had much trouble getting a loan for at least a couple of years now.  Subprime was slower to come back, but it has rebounded, too.

However delinquencies remained at historically low standards, even as the percentage of subprime loans increased. According to a study last year by TransUnion, another credit bureau, consumers in the latest recession were more likely to keep up with their car payments than other forms of debt, like credit cards or mortgages. That was a departure from earlier recessions, when consumers put their mortgages payments first.