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Auto Debt Up, but Borrowers Keep Delinquency Low

With automakers in Canada upping incentives and enticing shoppers to come out and make that car purchase, auto borrower debt in the country jumped close to 7 percent year-over-year during the third quarter, while auto delinquencies still remained rather low, TransUnion's Tom Higgins explained to Auto Remarketing on Thursday.

More specifically, third-quarter auto borrower debt — which the company defines as the entire balance on all car loans for an average individual borrower — came in at $17,283.

A year ago, it was $16,183; and during the second quarter of 2011, it was $16,671.

"We don't have specific numbers that link to it, but we see a lot more promotional activity in the auto market, particularly with the new cars," Higgins explained in the interview.

"So a lot more deals, a lot more financing deals are there that are an incentive to go out and replace those cars," he continued.

"There's still a little bit of a lag from the fallout of the recession, that people held their cars a little bit longer. And with keeping their cars an extra year, an extra two years longer than they may have in the past, the debt rate is down," Higgins added. "Now they're trading them in, upgrading, they're taking advantage of the new deals, so that's popping the debt up."

Delinquencies on car loans in Canada, though, have managed to stay low, even with more debt.

For the third quarter, the auto delinquency rate was at 0.11 percent, compared to 0.10 percent in the second quarter and even with the year-ago period.

While up 10 percent, Higgins stressed the sequential increase is fairly insignificant when looking at it in absolute numbers. The delinquency rate has kind of "fluttered around, up and down," he said, stressing that "the delinquencies are still very low historically and still maintaining that level.

"So no concern there that it's all of a sudden starting to go up," Higgins noted.

As to why they are staying so low, he explained that with some many people commuting in Canada, particularly in the big cites, cars are vital for people. They need to have a car.

"So it's one of those elements that consumers will try to ensure that they don't fall behind in their payments," Higgins pointed out, noting the same thing about mortgages. He added that consumers may be more willing to let other types of debt payment be pushed back before they let car and mortgage payments slide.

The areas with the highest auto borrower delinquency in Canada during the quarter were Manitoba (0.49 percent), Nova Scotia (0.19 percent) and New Brunswick (0.18 percent), respectively.

Conversely, Quebec had the lowest rate (0.07 percent), with Newfoundland and British Columbia each hitting 0.08 percent.

Overall Debt Trends

Moving along, TransUnion also offered some more overall credit trends. The average Canadian consumer had total debt of $25,594 outside of mortgages. This drop in debt was the third straight quarter that this figure has either declined or remained stable sequentially.

Before this three-quarter string, there were 26 straight quarters of increases.

"The latest quarterly data suggests that Canadian debt loads truly are stabilizing," Higgins noted. "Global economic uncertainty surely played a part in Canadians' move to further draw down their debt load.

"In the third quarter alone, Canadian consumers witnessed major stock market declines, the European debt crisis and continued high unemployment," he added.

Six provinces either saw debt decline or remain static. Year-over-year, just British Columbia and New Brunswick dipped in total balance.

"The next two quarters will be important as we observe if year-over-year total debt begins dropping in the majority of provinces," added Higgins.

Moreover, TransUnion emphasized that despite the sequential trending, consumer debt climbed 1.71 percent year-over-year. But the year-over-year growth rate in debt has dropped. In the second quarter, the rate of growth was 2.99 percent. It was 4.49 percent in the first quarter and came in at 5.6 percent in the fourth quarter of last year.

As for delinquencies, all categories (credit cards, lines of credit, installment loans, auto) were down on a year-over-year basis. However, installment loans (up 3.9 percent) and auto climbed.

"When evaluating delinquency levels, it's important to put emphasis on lines of credit as they account for over 40 percent of all Canadian non-mortgage debt," Higgins explained. "Since the second quarter of 2009, lines of credit delinquencies have dropped 5 basis points from 0.25 percent to 0.20 percent.

"Though delinquency levels have remained relatively stable during the third quarter, increased unemployment may place some pressure on these levels in the coming months," he added. "October unemployment rates rose from 7.1 percent to 7.3 percent in Canada and with the holiday shopping season gearing up, it wouldn't be surprising to see delinquencies rise in the next two quarters."