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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Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at

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  1. I don’t know why everyone, including you in this post, keeps tip-toing around the fact that we’re going into a recession right now. There is no “maybe’, it’s happening. There is nothing that can be done right now to stop it. The fundamentals of our economy need correction. We have been spending huge amounts of money we don’t have (despite what VP Cheney says, deficits DO matter) and the government and consumers have been spending like sailors on shore leave, oil is going to keep going up, our jobs keep going overseas because the large corporations make more profit that way, the dollar continues to tank, etc. We’re going to have a bad 2008. And we will probably have a bad 2009, too, no matter who gets elected, because it’s going to take a long time to fix the damage that’s been done under the faux Republican administration of GWB.

    Car loans and vehicle sales are just one symptom of the disease that the U.S. economy has right now.

  2. I guess the only thing that would change if you lease your car instead of buy your car is that the rate would go up. The credit requirements wouldn’t change because you have to have good credit to lease, right? And the down payment isn’t going to change because it’s a lease. So the payment might be a little higher. But then again, if car sales are bad, then I guess there would be special leasing deals, so maybe not.

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