As Loan-to-Value Ratios Rise and Used Vehicle Values Fall, More Consumers Find Themselves with Negative Equity

June 20, 2023 at 08:00 AM EDT

CHICAGO, June 20, 2023 (GLOBE NEWSWIRE) -- A return to a vehicle environment closer to the pre-pandemic norm has allowed for inventories to replenish and for vehicle values to stabilize. A newly released TransUnion (NYSE: TRU) and J.D. Power study contends that 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,” said Satyan Merchant, senior vice president and auto business lead at TransUnion. “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.”

Originating LTVs Among Used Autos Have Marched Upwards in Recent Years

	Q1 2020	Q1 2021	Q1 2022	Q1 2023
New	101	102	105	104
Used	112	104	110	125
Source: AutoCreditInsight by S&P Global Mobility, TransUnion

Higher Prices Led to Record High Monthly Payments for Borrowers

	Q4 2021	Q3 2022	Q4 2022	Q1 2023
New	$653	$707	$729	$736
Used	$493	$529	$527	$523
Source: AutoCreditInsight by S&P Global Mobility, TransUnion

LTVs a Future Arbiter of Credit Performance

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.

“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,” said Merchant. “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.”

Click here to download more on the TransUnion study, “Impact of Unsettled Vehicle Values on Lenders and Consumers.” To learn more about how trended and alternative data can help lenders make more informed lending decisions, click here.

About TransUnion (NYSE: TRU)

TransUnion is a global information and insights company with over 12,000 associates operating in more than 30 countries. We make trust possible by ensuring each person is reliably represented in the marketplace. We do this with a Tru™ picture of each person: an actionable view of consumers, stewarded with care. Through our acquisitions and technology investments we have developed innovative solutions that extend beyond our strong foundation in core credit into areas such as marketing, fraud, risk and advanced analytics. As a result, consumers and businesses can transact with confidence and achieve great things. We call this Information for Good^®—and it leads to economic opportunity, great experiences and personal empowerment for millions of people around the world.

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