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Despite lender caution, subprime originations expected to grow in 2019

January 11, 2019
Anticipated growth in originations to subprime borrowers is a sign that the auto industry is normalizing and will stay healthy in 2019, said Brian Landau, a senior vice president at TransUnion.
Following a lender pullback from the subprime space in 2016 and 2017, subprime as a percent of overall origination volume is expected to rise to 16.5 percent in 2019, compared with 15.1 percent in 2017, according to TransUnion’s 2019 consumer credit forecast. 
"The auto market is starting to recalibrate itself after the pullbacks," Landau said
Positive economic trends and opportunities to boost profits are spurring the growth in subprime, Laundau said. Specifically, lenders feel more confident going back to subprime because of macroeconomic performance like stabilizing delinquencies and a low unemployment rate, he said. The 60-day delinquency rate is anticipated to stay flat at 1.44 percent through 2019.
Also, lenders are looking for new profit pools because of weighing consumer demand and increased competition. "If [a lender] is going to tap into subprime consumers, so are other lenders," Landau said. "The profit is in subprime, and lenders have to make money."
However, the percentage of subprime loan originations remains below what was observed at the onset of the last recession, TransUnion notes. In 2007, 20 percent of auto loan originations were subprime.
Despite industry apprehension that a downturn is looming, TransUnion reports that an increase in subprime borrowers should not serve as a sign of concern. 
"Balancing risk and returns is an instrumental part of consumer lending, and small increases to delinquency rates are often part of the planning process — a normal derivative of granting wider access to credit," said Matt Komos, vice president of research and consulting for TransUnion.
"Even though it has now been a decade since the last recession, lenders continue to be cautious," Komos added. "In our estimation, the rise in nonprime borrowing we have observed and expect to see next year is a net-net positive."
One area of concern for 2019 surrounds vehicle affordability. 
"Many factors may impact auto affordability in the coming year, which could result in a slowdown in origination growth," TransUnion noted in its consumer credit forecast. "The potential of rising tariffs could materially impact vehicle prices and consumer affordability. Furthermore, many consumers are purchasing and financing more expensive vehicles, such as SUVs and hybrids. Headwinds such as rising interest rates and fuel prices could also further impact auto affordability."