There's a certain fear factor that surrounds the word "bubble" in the investing community. Fair enough, considering how badly the subprime housing loan development ended for the U.S. and the rest of the world. For that reason, it's easy to understand investor anxiety as the automotive industry's average amount financed, average monthly payment, and loan length all recently rose to their highest levels since Experian Automotive began tracking the data.
While that might sound like bubble territory, let's take a look at more details, and at whether there is cause for concern.
Devil's in the details
First, let's take a look at the financial details to understand if the "all-time high" is much of an increase. The average amount financed on a new vehicle checked in at just over $29,500 during the fourth quarter of 2015. That was a 4% jump, or about a $1,170 increase compared to the prior year. When looking at the average monthly payment, it checked in at $493, a 2.3% rise, which adds about $11 to the monthly bill.
The average loan terms for new vehicles also moved higher, to 67 months, about two months higher than the prior year's average. What's potentially worrisome is that loan terms of 73 to 84 months, which is much longer than historical averages, grew 12% for new vehicles -- meaning those extremely long loan periods are making up almost 30% of new vehicle loans.
While it's unclear if longer loan periods growing in popularity will cause consumers to extend their purchase cycle, which would be a negative for the auto industry's sales, it certainly doesn't do anything positive in the grand scheme of things.
With average payments, amount financed, and loan lengths all at higher levels, should investors be concerned? Not yet, at least in terms of a scary bubble-territory discussion. Here's why.
What kind of consumer?
Sure, loans are lengthening and amounts are soaring, but if the consumer is good for it in terms of making paybacks, bubble talk becomes less concerning. Let's take a look at General Motors' (NYSE:GM) loans to consumers for a glimpse at what type of consumer its finance segment is loaning to.
Looking at General Motors Financial's origination mix by credit tier, it had $1.48 billion of loan originations to subprime consumers -- those with FICO scores less than 620 -- during the fourth quarter of 2014. Looking at the fourth quarter of 2015, that number to subprime consumers was basically flat at $1.47 billion. However, the interesting bit of information comes in the prime tier, which blew up from $1.8 billion in Q4 2014 to $5.7 billion in Q4 2015. Unsurprisingly, that's minimized the percentage of loans GM has out to subprime consumers.
Essentially, while GM is loaning to vastly more consumers, its loans are going to much safer consumers, who should handle increasing loan terms and payments effectively.
The story is similar for GM's crosstown rival, Ford Motor Company (NYSE: F), which has improved its already high average FICO score loan placement.
Ford Credit has managed to keep its average FICO score to consumers at a very high level, all while growing its contract volume from 1.9 million during 2014 to 2.1 million last year and growing its managed receivables from $113 billion to $127 billion. Loaning to consumers with higher FICO scores has helped Ford Credit check in with over-60-day delinquencies and loss-to-receivables of 0.12% and 0.33%, respectively, for full-year 2015. Those are low levels and not financially impactful.
Essentially, despite the industry's ballooning total amount financed and monthly payments, Ford and GM are growing their financial segments safely through prime consumers. Rather than loans to subprime consumers, the thing for investors to really watch is the growing popularity of loan terms of 73 to 84 months -- that seems to be a more worrisome "bubble" issue, in my opinion, than what type of consumer the loan is going to. Investors should definitely keep an eye on the amount of subprime loans automakers have going forward, but if longer loan lengths continue to increase, it could lengthen the time between consumer vehicle purchases, which seems to be a larger threat to the auto industry's sales growth in the near term.