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What’s Happening with Subprime Auto Loans?

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Auto loans have shot past the $1 trillion mark in the United States and now make up a significant component of the overall consumer debt picture.

Subprime auto loans – which are riskier loans made to customers with poor credit – have helped to drive the market since the Great Recession. However, with auto loan delinquencies ticking up in recent months, investors have been searching for answers about the sector.

Are we in for some sort of subprime auto loan crisis, or is there another explanation for what is going on?

Subprime Auto Loans: a Shifting Market

The data and perspective in today’s infographic comes from consumer credit reporting agency Equifax, and it helps to explain what is potentially going on in today’s auto loans market.

What's Happening with Subprime Auto Loans?

Does the recent uptick in auto loan delinquencies represent the unhinging of the market, or is it just standard fare?

Auto Loan Segmentation

The auto loan market is surprisingly diverse, and it’s comprised of many different types of lenders.

Each lender has a unique set of criteria for their ideal customer. For example, banks want very little risk and typically only lend to customers with prime credit scores (620 or higher). Dealer finance companies, on the other hand, are willing to take on more risk in their portfolios, and usually key in on subprime customers.

In fact, there are six different types of lenders in the auto lending space:

  1. Banks: Depository institutions that loan money to third-parties
  2. Credit Unions: Member-owned financial cooperatives
  3. Captive Auto Finance: Financing arm of an auto brand (i.e. Ford Motor Credit Company, etc.)
  4. Dealer Finance Companies: Associated with a dealerships or dealer chains
  5. Monoline Finance Companies: Focus on auto loans through multiple dealers/platforms
  6. Independent Finance Companies: Offer auto loans and other loan types

Because they each approach the market differently, there is strong segmentation in the market. The following chart from Equifax shows a snapshot of loans made in Q1 of 2015 and their cumulative non-performance after 18 months on the books:

Non-performance of auto loans vs. credit score

However, let’s look at this again by plotting the median credit score for new loans originated in Q1 of 2006, 2009, 2012, and 2015.

Non-performance of auto loans vs. credit score, longer time series

After the financial crisis, banks tightened credit standards until performance improved. Monoline and dealer finance companies, on the other hand, continued to lend to high-risk borrowers – and it is these companies that are seeing non-performance rates shifting higher.

In other words, it is the market share and relative performance among lenders that are the change drivers for aggregate loan statistics.

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Automation

Ranked: The Autonomous Vehicle Readiness of 20 Countries

This interactive visual shows the countries best prepared for the shift to autonomous vehicles, as well as the associated societal and economic impacts.

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For the past decade, manufacturers and governments all over the world have been preparing for the adoption of self-driving cars—with the promise of transformative economic development.

As autonomous vehicles become more of a looming certainty, what will be the wider impacts of this monumental transition?

Which Countries are Ready?

Today’s interactive visual from Aquinov Mathappan ranks countries on their preparedness to adopt self-driving cars, while also exploring the range of challenges they will face in achieving complete automation.

The Five Levels of Automation

The graphic above uses the Autonomous Vehicles Readiness Index, which details the five levels of automation. Level 0 vehicles place the responsibility for all menial tasks with the driver, including steering, braking, and acceleration. In contrast, level 5 vehicles demand nothing of the driver and can operate entirely without their presence.

Today, most cars sit between levels 1 and 3, typically with few or limited automated functions. There are some exceptions to the rule, such as certain Tesla models and Google’s Waymo. Both feature a full range of self-driving capabilities—enabling the car to steer, accelerate and brake on behalf of the driver.

The Journey to Personal Driving Freedom

There are three main challenges that come with achieving a fully-automated level 5 status:

  1. Data Storage
    Effectively storing data and translating it into actionable insights is difficult when 4TB of raw data is generated every day—the equivalent of the data generated by 3,000 internet users in 24 hours.
  2. Data Transportation
    Autonomous vehicles need to communicate with each other and transport data with the use of consistently high-speed internet, highlighting the need for large-scale adoption of 5G.
  3. Verifying Deep Neural Networks
    The safety of these vehicles will be dictated by their ability to distinguish between a vehicle and a person, but they currently rely on algorithms which are not yet fully understood.

Which Countries are Leading the Charge?

The 20 countries were selected for the report based on economic size, and their automation progress was ranked using four key metrics: technology and innovation, infrastructure, policy and legislation, and consumer acceptance.

The United States leads the way on technology and innovation, with 163 company headquarters, and more than 50% of cities currently preparing their streets for self-driving vehicles. The Netherlands and Singapore rank in the top three for infrastructure, legislation, and consumer acceptance. Singapore is currently testing a fleet of autonomous buses created by Volvo, which will join the existing public transit fleet in 2022.

India, Mexico, and Russia lag behind on all fronts—despite enthusiasm for self-driving cars, these countries require legislative changes and improvements in the existing quality of roads. Mexico also lacks industrial activity and clear regulations around autonomous vehicles, but close proximity to the U.S. has already garnered interest from companies like Intel for manufacturing autonomous vehicles south of the border.

How Autonomous Vehicles Impact the Economy

Once successfully adopted, autonomous vehicles will save the U.S. economy $1.3 trillion per year, which will come from a variety of sources including:

  • $563 billion: Reduction in accidents
  • $422 billion: Productivity gains
  • $158 billion: Decline in fuel costs
  • $138 billion: Fuel savings from congestion avoidance
  • $11 billion: Improved traffic flow and reduction of energy use
    • With the adoption of autonomous vehicles projected to reduce private car ownership in the U.S. to 43% by 2030, it’s disrupting many other industries in the process.

      • Insurance
        Transportation will be safer, potentially reducing the number of accidents over time. Insurance companies are already rolling out usage-based insurance policies (UBIs), which charge customers based on how many miles they drive and how safe their driving habits are.
      • Travel
        Long distance traveling in autonomous vehicles provides a painless alternative to train and air travel. The vehicles are designed for comfort, making it possible to sleep overnight easily—which could also impact the hotel industry significantly.
      • Real Estate
        An increase in effortless travel could lead to increased urban sprawl, as people prioritize the convenience of proximity to city centers less and less.
        • Defining the parameters for this emerging industry will present significant and unpredictable challenges. Once the initial barriers are eliminated and the technology matures, the world could see a new renaissance of mobility, and the disruption of dozens of other industries as a result.

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Automotive

Palladium: The Secret Weapon in Fighting Pollution

The world is in critical need of palladium. It’s a crucial metal in reducing emissions from gas-powered vehicles, and our secret weapon for cleaner air.

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Despite the growing hype around electric vehicles, conventional gas-powered vehicles are expected to be on the road well into the future.

As a result, exhaust systems will continue to be a critical tool in reducing harmful air pollution.

The Power of Palladium

Today’s infographic comes to us from North American Palladium, and it demonstrates the unique properties of the precious metal, and how it’s used in catalytic converters around the world.

In fact, palladium enables car manufacturers to meet stricter emission standards, making it a secret weapon for fighting pollution going forward.

Palladium: The Secret Weapon in Fighting Pollution

The world is in critical need of palladium today.

It’s the crucial metal in reducing harmful emissions from gas powered vehicles—as environmental standards tighten, cars are using more and more palladium, straining global supplies.

What is Palladium?

Palladium is one of six platinum group metals which share similar chemical, physical, and structural features. Palladium has many uses, but the majority of global consumption comes from the autocatalyst industry.

In 2018, total gross demand for the metal was 10,121 million ounces (Moz), of which 8,655 Moz went to autocatalysts. These were the leading regions by demand:

  • North America: 2,041 Moz
  • Europe: 1,883 Moz
  • China: 2,117 Moz
  • Japan: 859 Moz
  • Rest of the World: 1,755 Moz

Catalytic Converters: Palladium vs. Platinum

The combustion of gasoline creates three primary pollutants: hydrocarbons, nitrogen oxides, and carbon monoxide. Catalytic converters work to alter these poisonous and often dangerous chemicals into safer compounds.

In order to control emissions, countries around the world have come up with strict emissions standards that auto manufacturers must meet, but these are far from the reality of how much pollutants are emitted by drivers every day.

Since no one drives in a straight line or in perfect conditions, stricter emissions testing is coming into effect. Known as Real Driving Emissions (RDE), these tests reveal that palladium performs much better than platinum in a typical driving situation.

In addition, the revelation of the Volkswagen emission scandal (known as Dieselgate) further undermines platinum use in vehicles. As a result, diesel engines are being phased out in favor of gas-powered vehicles that use palladium.

Where does Palladium Come From?

If the world is using all this palladium, where is it coming from?

Approximately, 90% of the world’s palladium production comes as a byproduct of mining other metals, with the remaining 10% coming from primary production.

In 2018, there was a total of 6.88 million ounces of mine supply primarily coming from Russia and South Africa. Conflicts in these jurisdictions present significant risks to the global supply chain. There are few North American jurisdictions, such as Ontario and Montana, which present an opportunity for more stable primary production of palladium.

Long Road to Extinction

The current price of palladium is driven by fundamental supply and demand issues, not investor speculation. Between 2012 and 2018, an accumulated deficit of five million ounces has placed pressures on readily available supplies of above-ground palladium.

Vehicles with internal combustion engines (ICE) will continue to dominate the roads well into the future. According to Bloomberg New Energy Finance, it will not be until 2040 that ICE vehicles will dip below 50% of new car sales market, in favor of plug-in and hybrid vehicles. Stricter emissions standards will further bolster palladium demand.

The world needs stable and steady supplies of palladium today, and well into the future.

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