Auto Loan Delinquencies Spike
It will be probably harder and more expensive to get an installment auto loan in 2008
By Brendan Moore
According to an article in The Wall Street Journal this morning, auto loans in the United States are starting to feel the effects of the slowing economy, with late pays and delinquencies at their highest levels in many years.
Such a development not only means trouble for the auto lenders now, but as those lenders take unplanned losses in their auto loan portfolios, the consequence for borrowers will be tighter credit regarding auto loans in the future. And tighter credit from an asset lender’s perspective is not simply a matter of requiring a better credit bureau score; it also covers the inevitable heightened requirements for the down payment and a higher interest rate on the loan in order to better cover the increase risk in the lending sector.
If an average consumer must now have a better credit score, put down a bigger down payment, and make a larger monthly payment in order to get an installment auto loan, it stands to reason that there will be less auto loans next year. If the U.S. wobbles into an economic recession, then auto loan volumes will be reduced further as a result of the poor overall economy.
The NAFA (National Auto Finance Association) says approximately $575 billion USD in auto loans are made every year. Any reduction in that number would hurt both the lenders and the retail auto dealers, which depend on the income from their loan-origination activities (the F&I department) at the dealership to make a profit.
There is also another lending factor that may reduce vehicle sales next year. The troubles in the mortgage and home-equity sectors mean that the number of people who were getting a home-equity loan in order to buy a car (and get a tax deduction in the bargain – what could be better, right?) will now shrink to almost nothing. No one has ever been able to calculate just how often this was happening, and in fact, the guessed-at frequency was the matter of some speculation in the auto lending and home-equity lending arenas, but there is no doubt that it occurred at some level.
Add it all up and you reach the inescapable conclusion that not only will there be fewer buyers for new vehicles in 2008 as a result of lower sales forecasted, there will be less available credit for those buyers to avail themselves of, and the terms of that available credit will be less favorable than in the recent past.
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