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Plateau in US auto sales heightens risk for lenders

30 Mar 2017
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Plateau in US auto sales heightens risk for lenders

As U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders. Analysts say that that the combination of plateauing auto sales, growing negative equity from consumers and lenders' willingness to offer flexible loan terms is a significant credit risk for lenders. Motor vehicle sales have boomed in the years since the Great Recession. U.S. sales of new cars and trucks hit a record annual high of 17.55 million units in 2016.

 

 

It is expected that U.S. new vehicle sales will decline slightly to 17.4 million units in 2017.That would mean lenders will be chasing fewer loans, which could cause them to further loosen loan terms and loan to value criteria. Over the past several years, lenders have supported automotive credit growth with "accommodative financing," including longer loan terms. With every successive year, lenders' profitability is getting thinner and thinner, and their credit losses have been growing. In the first nine months of 2016, around 32 percent of U.S. vehicle trade-ins carried outstanding loans larger than the worth of the cars, a record high.

 

 

Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers' next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time. Over the course of multiple trade-ins, negative equity accumulates. This is called the "trade-in treadmill," the result of which is increasing lender risk, with larger and larger loss-severity exposure. To ease consumers' monthly payments, car manufacturers could subsidize lenders or increase incentives to reduce purchase prices, though either action would reduce their profits.

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