TransUnion VP: More used buyers start off in negative

More used-car buyers were in negative equity positions on their vehicles at loan origination in the first quarter, said Satyan Merchant, TransUnion senior vice president and auto business lead.

In the first quarter, used-car borrowers had on average of almost $9,000 in negative equity at origination, according to a J.D. Power and TransUnion study released in June. Consumers buying more expensive used cars with less or no money for a down payment contributed to this, he said.

The TransUnion/J.D. Power Impact of Unsettled Vehicle Values on Lenders and Consumers study showed the percentage of used vehicles with a loan-to-value greater or equal to 140 percent at origination more than doubled to 30 percent in the first quarter from 14 percent a year earlier.

Merchant spoke with Staff Reporter Gail Kachadourian Howe. Here are edited excerpts.

Q: What’s the trend for loan-to-value ratios?

A: There are more and more loans on the used side being originated at higher [loan-to-value]. On the subprime side, there’s a pretty substantial number of loans that recently have been originated at 125 percent at buy-in where they’re coming in at high negative equity just off the bat.

Are only certain borrowers in negative equity at origination?

Consumers are starting off in the negative equity position all the way to the superprime consumer, which is kind of surprising because that superprime consumer usually brings some cash to the table.

How does loan-to-value ratio affect payment habits?

For those consumers [who] actually gained some equity, or at least [their used car] depreciated at a lower rate, their [loan-to-value] position improved; they went delinquent at a far, far lower rate than a consumer who originated at a 140-plus [loan-to-value] and then the value of the vehicle depreciated more rapidly. It stands to reason that a consumer might come on tough times and their car might be worth less and they may not be able to pay the loan.

What surprised you most about this study?

We looked at a bunch of loans originated from Q1 2018 to Q1 2022. What we found was that even when somebody originated at 125 [loan-to-value] and they’re a below-prime consumer, if their monthly payment was lower, then they were going to perform better on the loan. In this case, the long-term loans helped alleviate the payment for the consumer. Then we found it’s not across the board. Other tiers like the more prime borrower perform worse with a long-term loan. For certain borrowers, maybe it is a good idea to extend the terms or think about some way to extend the term because it helps manage that payment.

What’s your advice for lenders?

The No. 1 thing is get the best picture you can using data. A trended report will [show] not only [what] did you pay, it shows a lot more detail and you can find trends. If a consumer, whatever their credit score is, [is] showing a trend where they’re paying more and more against their debts every month means they’re actually in a strong position, they’re paying down their debt at a faster rate. And that actually tends to be a signal they’ve got excess money. And on the flip side, it could tell the other story like somebody else is paying less and less. That could be a signal this person might have some liquidity issues.

The other one that I think is interesting is alternative data. This is like utility payments, cellphone bills, magazine subscriptions. That’s really helpful for [consumers] new to the country, new to credit. Quite a few auto lenders use these solutions.

How does alternative data help an auto lender?

There could be consumers, especially younger ones, who may not use credit cards but use Venmo or something. How they pay their obligations is shifting. Using that sort of data helps them think through, “OK, what’s your credit score?” Maybe we wouldn’t approve you for a higher loan-to-value deal, but all this alternative data tells me you are responsible and you are strong on those obligations. So maybe you are eligible for a higher loan-to-value deal, and we feel safe with that. These credit factors are what a lender takes into account when they say “I’ll give you an 84-month loan instead of a 60-month loan,” and as we saw the data, term extensions could help.

Has the industry experienced an economy similar to today’s?

This one’s really hard to make sense out of because we’ve never seen used-vehicle valuations go on the path that they’ve been on. And even that aside, this whole high interest or high inflation but also extremely high employment. I don’t know if there’s other recessions where we’ve had such strong employment.