Surge in Auto-Loan Delinquencies
This entry was posted on 12/6/2007 12:40 PM and is filed under Lending.
The Wall Street Journal reported today that delinquencies in the auto-loan market are inching up
to their highest level in several years. Lenders are tightening terms
in some cases, and interest rates have risen from the rock-bottom
levels of a few years ago.
According to the National Automotive Finance
Association, about $575 billion in loans for new and used
cars are made annually.
Now, about 4.5% of auto loans made in 2006 to A-credit
borrowers were at least 30 days delinquent as of the end of September,
up from 2.9% the previous month, according to a Lehman Brothers survey
of companies servicing these loans. That is the biggest one-month jump
in at least eight years.
The same survey reported that 12% of subprime borrowers, who
have poorer credit records, were delinquent on their 2006 auto loans as
of September. That is the highest level since 2002 and up from 11.1%
the previous month.
Car loans differ from home loans in that the underlying asset virtually always loses value over time. When an auto loan becomes delinquent, what was once a manageable payment is no longer yet there may be insufficient value with the asset to trade and fully escape the debt. Auto loan delinquency is often tied to the loss of a job, health issues or even a divorce. As such, when auto loan delinquencies rise, they are seen as a stronger indication of a weak economy than trouble in the housing market.
During recessions, auto loan sales can be supported by easy borrowing terms. But if credit tightens due to delinquencies, the resulting difficulties in borrowing should dramatically hurt auto sales.
U.S. auto sales are down about 2.5% this year, and the
auto industry is bracing for sales to decline further in 2008. Interest
rates on auto loans have increased to nearly 8% from about 6.5% in late
2004, according to J.D. Power & Associates.
There are reasons to believe the problems in auto
loans won't reach crisis levels. Auto lenders and credit counselors say
many consumers see their cars as a necessity and would sooner hand back
the keys to a home and look for a rental than default on a car loan. Some consumers will also choose to pay the smaller auto loan installment than the larger mortgage payment. Also, manufacturer related lenders such as Ford Credit and GMAC tend to avoid subprime auto loans and as such will likely continue to offer low rates and flexible terms.
As reported by JEFFREY MCCRACKEN and GREGORY ZUCKERMAN, The Wall Street Journal, December 6, 2007, pg 1.
