Lenders have been busy issuing auto loans, particularly as the influx of off-lease used vehicles continues to increase and put downward pressure on prices.
As the inventory of off-lease used vehicles continues to increase
and become available to consumers, prices for such vehicles have been gradually dropping. Such a scenario is making the purchase of a used vehicle very attractive for consumers, considering the increased affordability of these transactions. As more and more consumers look to buy used vehicles at attractive prices, more auto loans will be taken out to finance these purchases.
Thanks to a strengthened labor force and cheap gas prices, consumers have been increasingly flocking to dealers' showrooms, to the point that auto sales hit a record in 2015. Auto lenders have been following suit to provide financing in order to accommodate the growing American desire for automobiles.
But along with such a surplus of used vehicles comes a unique situation for auto lenders, who are increasingly selling off their delinquent loans and locking in prices on distressed debt in an effort to avoid further drops in prices into the near future.
Drop in Auto Prices Could Leave Lenders With Low-Value Collateral
With the flood of new cars continuing to come off lease, analysts anticipate downward pressure on used- and new-car prices
, which could result in consumers owing more on their auto loans than the actual value of the vehicles.
Many auto lenders have been tapping into subprime lending to help consumers with lower-end credit scores obtain the financing needed to make these large purchases. But experts are concerned that certain auto lenders are taking on too much risk by providing financing for vehicles as their prices continue on a downward spiral, especially when it comes to subprime lending. As used-car prices continue to decline, lenders could be left with very little in their hands should their borrowers end up delinquent on their auto loans.
Auto lenders are increasingly looking to get rid of high-risk loan assets in order to avoid being stuck with low-valued collateral.
Lenders Capping Their High-Risk Auto Loan Assets
Ally Financial Inc
., which depends largely on its auto loan sector, has recently started to reduce its subprime auto loan assets. In the second quarter of 2016, subprime loans accounted for approximately 11 percent of the company's loan originations, down from approximately 13 percent the same time last year.
Capital One Financial Corp
. is also scaling back on subprime, which can be defined as credit scores between 540 and 620. By the end of the first quarter, consumers with credit scores of 620 or less contributed 32 percent of the firm's outstanding auto loans, a decrease of 3 percent from the previous year.
High-risk consumers may pose no problem for lenders dabbling in the subprime auto lending market as long as these same consumers are doing well in their financial lives. However, when these consumers encounter troubles with financing, that trouble will soon extend to their lenders. Should consumers start defaulting on their loans, a lot of auto lenders could be stuck with the very vehicles that they helped finance. Yet with a continued decline in vehicle pricing, auto lenders could be left with collateral that's worth a lot less than the loans issued to those who borrowed to finance such purchases.
Loan Advisors Help Hedge Against Costly Loan Assets
If auto lenders are considering taking back their collateral, they should consider selling now before such collateral's downward price spiral hits rock bottom. At this point, lenders should be using the services of seasoned loan advisors, like Garnet Capital, to help protect against capital losses as a result of delinquent auto loans.
Register for our online portfolio auction system
today to discover how we can help you protect your loan assets.