According to Moody’s Investors Service, increased competition for issuing auto loans will result in lenders taking greater risks and lowering underwriting standards. “Auto lenders will continue their return to higher levels of risk-taking, a trend that emerged in 2013 and will gain momentum in the coming year,” Moody’s analysts Jeffrey Hibbs, Mack Caldwell and William Black wrote in a report published Monday. Greater competition between lenders will result in “ever-more generous loan terms,” they said.
As the economy has slowly improved, losses on vehicle debt are down across the board, regardless of creditworthiness, compared to historic norms. That fact and continued low interest rates are attracting lenders into the car loan market.
Loan terms for buyers with good credit started to relax last year, following a longer term trend of more relaxed subprime lending. The analysts note that there has been an increase in delinquencies in recent months. Still, Moody’s says that losses on asset-backed bond deals linked to the debt are expected to be contained because those losses from relaxed underwriting will be offset by fewer losses due to an improving economy.
The relaxed credit terms will probably last longer than the sales upswing. Moody’s predicts sales to reach 16 million units next year as consumers replace cars they’ve been hanging on to during the recession and slow recovery. Once new car sales level off, standards may even get lower. “Once sales begin to peak and subsequently subside, lenders anxious to maintain share and sales targets will further accelerate the pace of weaker credit originations,” the analysts said.
Moody’s also reports that leasing, which has traditionally been a big factor in the luxury market, is starting to represent a growing percentage of more mass-market cars as those cars have gotten more expensive. Leases now represent 28% of all new car and light truck deliveries in the U.S. up from less than 19% in 2007.