There is little doubt that the US auto retail market is revving up. Annual new-car sales are currently 58% higher than they were in 2009, with many forecasters predicting sales of over 17 million units by the end of the year. The US economy is in better shape than it has been for some time, and with employment prospects improving, consumers are more likely to consider buying a car. That’s good news for auto lenders as well as dealers, as industry statistics show that 84% of new vehicles purchased at the end of 2014 relied on financing.
Used vehicles that were financed reached a record high of 55.2% over the same period. A quarter (25%) of all new auto purchases are via a lease, which means one in four new vehicles, and approximately 30% of all finance transactions, are leases. But a significant proportion of would-be buyers have credit ratings that place them firmly in the sub-prime category – the group whose default rates pushed many lenders and dealers to the wall when the financial crisis hit back in 2008. Little surprise, then, that some fear a repeat of the difficulties that saw the wheels come off the sub-prime auto lending business seven years ago. That was when weak underwriting standards led to a ballooning of loans to borrowers with poor credit history, followed by a steep rise in delinquencies and a flood of cars into the used car market, pushing down residual values.
Today, increases in the average value of loans, coupled with lengthening repayment terms, are starting to cause concern that the same journey is about to be repeated. However, lenders and dealers are currently paying much more attention to those key indicators than they may have done in the past, not least because a raft of new regulations mean the sector is now under close scrutiny at both state and federal level. Pessimists At the end of 2014, the total for outstanding auto loan balances hit an all-time high of $886bn, 10% up on the 2014 total for the same period and 11% higher than in 2013. While that’s good news for the industry, some observers have begun to worry about where it all might end. For instance, the Center for Responsible Lending (CRL), a not-for-profit organization that looks at household finances, calculated that in Q3 2014, nearly 39% of open auto loans worth $337 billion were for customers with below-prime credit. That was up from $304 billion owing in the sub-prime category in 2013 and compares with $255 billion in 2012.
Another trend is the move for lenders to extend repayment periods to up to 84 months on new and used vehicles, compared with the traditional option of 60 months. As one commentator pointed out, a family with sub-prime credit taking out a loan at 110% of a used car’s value when their daughter celebrates her ninth birthday will still be paying for it when she takes it for her first drive on her 16th birthday. Optimists But since the great recession, auto lenders have got older and wiser. Several have publicly stated they do not offer 84-month loans, in part because they want customers to return to the trade cycle more often. Of those that do, all are limiting their exposure and most point to the prime and super-prime segments as the areas where they are making money. It’s not a completely smooth ride for sub-prime specialists, however.
Several big name lenders have been called in by the Department of Justice to face allegations of discriminatory lending practices and unfair loan terms. The Consumer Financial Protection Bureau, formed in the aftermath of the financial crisis, is another regulator keeping a close watch on sub-prime auto finance and seeking to root out practices which, it claims, favour the lender and dealer over the car buyer.
Industry experts, analysts and finance specialists take a close look at all the issues in depth, along with much more data and analysis, in the latest White Clarke Group US Sub-Prime Auto Finance Market Survey 2015, which is free to download here.
About White Clarke Group
White Clarke Group is helping sub-prime auto finance companies to grow their business by allowing them to react to the ever-changing needs of customers and channel partners while maintaining credit quality. It is a global organization employing around 600 professionals, with offices in the UK, China, USA, Canada, Australia, Austria and Germany. The company’s award-winning CALMS end-to-end platform provides a flexible workflow approach that automates the entire business process from origination through contract to portfolio management, trusted by more than 100 customers in 30 countries around the globe. For more information, please visit www.whiteclarkegroup.com.