U.S Auto Loan Industry Show Signs Of Potential Financial Problems

Auto Loan Industry

The nation’s auto-loan market is showing signs of strain:

  • Delinquencies have risen to their highest levels since 2009 for lower-rated borrowers.

  • The number of auto loans in delinquencies have grown at their quickest pace and is considered a huge quantity of all U.S. household liabilities in 14 years.

  • The losses and delinquencies are set to get worse before they get better.

Does this mean the nation could experience a 2008-like meltdown? Not really. After all, in 2008, there were $8.9 trillion lost in the U.S mortgage market and another $8.6 trillion lost for the dollar-dominated corporate credit. The auto market is set to only lose $1.1 trillion.

Of course, that doesn’t mean that the auto-loan losses are not a concern. They are, especially since the economy is still in recovery mode. The more borrowers that can’t pay their bills, the more losses there will be.

Ally Financial recently reported it had an 11% drop in pretax profit during its fourth quarter, experiencing a rise in losses and delinquencies. Capital One said one-third of the $45 billion auto loans it gave out were to subprime borrowers. The company said there was a 52% spike in provisions with a pretax profit dropping 40% in its consumer lending unit.

Still, investors don’t seem all that concerned. Shares of Capital One have increased 29% since the end of September with Ally’s shares going up 20%. But, it’s important these companies are kept a close eye on since they are the harbingers of the auto industry’s pain and in a broader sense – consumer creditworthiness.

The pain they’re feeling won’t be isolated. Smaller lenders like Flagship Credit Acceptance, Exeter Finance and Westlake Financial services will also experience some financial pains.

While less-creditworthy borrowers will have problems being approved for a loan, they’re not the auto loan investors’ biggest concern. Instead, it’s the subprime loans that have them considered, as the investors have a small margin to handle losses, which can add up quickly.

Although the economy is strong, delinquencies are on the rise. If the growth slows, more car owners, even those with good credit, could experience problems. With losses and delinquencies cutting into the profits, companies may choose to underwrite auto loans with a narrow yield. This will eliminate any room for error and cause the problem to worsen if the growth stalls. Plus, with used-car values dropping, the chance to gain anything of value back decreases.

Should auto lenders decide aggressiveness is the way to go to boost profits, it could amount to even worse losses.

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