By on November 29, 2013

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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.

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21 Comments on “Moody’s: Auto Loan Standards Will Be Relaxed in 2014. Leases to Increase As Prices Climb...”


  • avatar
    Good ole dayz

    Leasing: the auto acquisition equivalent of the payday loan.

    • 0 avatar
      jmo

      The entirely depends on the deal you’re getting.

      Paying 10k for a 10 year old Accord with 120k miles could be a worse deal than leasing a new one for $189/month with $0 down.

      • 0 avatar
        Good ole dayz

        But don’t forget sales tax on the lease and other add-on fees, plus higher insurance on the new car, plus the potential mileage / damage hit at lease-end, and no equity, meaning one is forced back into the acquisition cycle at a date certain (at which time one’s job situation, interest rates etc. may be considerably less favorable).

        IMHO leasing can make sense in a minority of situations, for most it’s a mechanism for folks to drive cars they really can’t afford, and for manufacturers to inflate selling prices well above what they’d be in a “traditional” retail market in which people actually buy the vehicle (since most folks “buy” based on whether they can afford the cash flow of the monthly payment, and so leasing artificially lowers the monthly payment).

        • 0 avatar
          jmo

          “for most it’s a mechanism for folks to drive cars they really can’t afford”

          Is that really the case?

          I know women who love something like the the Subaru Legacy $189/month $2k down lease deal. You pay your money and have nothing to worry about for 3 years.

          Could they afford something nicer? Sure. But, at the cost of a nice dinner and a good bottle of wine a month, they can get from point a to point b with no worries.

        • 0 avatar
          segfault

          While leasing can be a rip-off, the blanket statements against leasing tend to ignore a few facts:
          1. A lot of people will trade vehicles every few years, whether they lease or buy. The lease allows them to do this without being disappointed with the trade-in value of their three year old car.
          2. Some leases have lease-specific incentives attached to them, such as an artificially inflated residual value and a near-0% money factor, which make it far less expensive to lease than buy for a given 2-3 year holding period.

          A mileage hit at lease end isn’t a concern if you purchase an appropriate number of miles going in to the lease. Obviously, commutes and driving patterns can change during the lease, and you have to make a decision at that point to either pay the excess mileage fee or buy a second car.

          “Higher insurance on the new car” is a non-issue if you’re comparing leasing to buying an equivalent new car and trading the car in every few years. Some leases do require a higher amount of liability coverage, which you should have anyway. If you have a ten year old car which you own outright and choose to carry liability only on, then yes, the insurance will be cheaper.

          • 0 avatar
            kmoney

            Agree with this. Especially for any kind of luxury or near luxury car. If you looks at most of these the NPV of the lease is probably 2/3-3/4 of what you would lose if you outright bought the car or financed it and attempted to resell it after 3-5 years.

            That said, leasing a Civic, Corolla, Matrix et al. is probably a pointless endevour as their resale is much closer to the purchase price. I would still say the only true value in cars is to buy lightly used and drive into the ground, at least from a purely financial perspective.

          • 0 avatar
            jmo

            “I would still say the only true value in cars is to buy lightly used”

            But, aren’t you usually paying top dollar for a lightly used Corolla or Civic? Is there usually any money left on the table, all things considered?

          • 0 avatar
            highdesertcat

            segfault, the key to that strategy of buying and trading every 3-5 years is to be able to pay for the vehicle outright and then get only the minimum insurance required by law.

            Several old codgers I know have been doing that for years, and they’re not wealthy by any means.

            One 74 year old gets in ~ $2400 every month, saves $1K of that and uses the remainder to live on with his wife. In 3 years he has $36K saved up. More than enough for a new car with the old one as trade.

            I hope to get to that stage at some point in my life. But for now I have three high-maintenance females to take care of. And that takes ALL of MY money.

  • avatar
    brettc

    I don’t see how this could turn out badly…

    That being said, if car manufacturers’ credit divisions (specifically VW Credit) could continue to offer less than 1% financing for the next 4-5 months, that would be great as the wife needs a car. No leasing for us even though it can be good for some people.

    It will be interesting to see how this “relaxing” goes in the next couple of years.

  • avatar
    ash78

    “As the economy has slowly improved, losses on vehicle debt are down across the board”

    Part of this could be the better residual values we’ve seen over the past few years. Borrower could still be defaulting at the same rate (or worse) than always, but as long as the recovery values are better than historical, many “less sophisticated” lenders will see this as a good thing — they were dealt a good hand in the secondary market, but I’ve personally seen management congratulate themselves on good work, even when the actual defaults were no better.

    So let’s say residual values DROP while lending standards are being loosened. An increase in defaults PLUS a reduction in recovery values is a perfect storm for losing money. That’s why all lending has to be assessed using both PD (probability of default) and LGD (loss given default) independently. Otherwise it’s akin to managing your personal finances simply in terms of how much money you have left in your checking account. “What?! Where did all my money go?”

  • avatar
    jmo

    Also, as I understand it, one of the reasons for the financial crisis was the idea that people would do anything to pay their mortgage. They’d default on their credit cards, they’d let their cars get repossed and buy $500 beaters, etc.

    However, it turns out that cars are the top payment people will try and keep current.

    As such, maybe lenders are adjusting terms to reflect the reality that they are more likely to be paid than they thought?

    • 0 avatar
      ash78

      Very possible — when push comes to shove, the payment on the primary car is the last one to go. I oversaw risk a $billion+ portfolio of auto and mortgage loans in 08-09 and it was very predictable. The old saying “I can live in my car, but can’t drive my house to work” is wise.

      Lenders in this space are easily spooked. They don’t want to be the last one lending to the bad borrowers, and they don’t want to be the first one who starts lending to them again after a hiatus. Otherwise, you get a glut of all the bad stuff coming JUST to you. Strength in numbers.

      • 0 avatar
        segfault

        Strength in numbers can also quickly become a lemming mentality. “Everyone else is making loans to people with FICO scores in the 500s, we’d better start doing it too so we remain competitive.”

  • avatar
    28-Cars-Later

    “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.”

    So one of the last real things you could truly “own” is being taken away? Thanks overlords.

  • avatar
    CarPerson

    BMW is offering 0.9% financing. They are also offering a $500 or $1000 “Holiday Bonus” credit on the first one or two monthly payments.

    My $32,500 36-month loan has a total interest of $465. Calculating in the $500 holiday bonus, BMW Finance is paying me $35 to use their money for three years. The cash that was going to be used to buy the car is earning 12.5% annual interest.

    Instead of having $0 in that account three years from now, I will have $47,200.

    Using their loan instead of paying cash put $14,700 in my pocket and they paid me $35 to do it. That’s the best $35 anyone has ever given me. Of course the 335i is kinda nice too.

    • 0 avatar
      exit

      It gets even better! After 3 years, when the 335i is worth nowhere near the residual value(artificially inflated residuals are common for luxury vehicles), you hand it back to BMW so that they take the loss, and repeat.

      But what if the car is worth more than the residual? Sell it privately or to the dealership, CarMax, AutoTrader Trade-in Marketplace, etc., and pocket the equity!

      What happens to the car once it is turned in? The manufacturer auctions it to the dealerships, generally at a loss, the car gets reconditioned, extended factory warranty (again more money out of the manufacturers pocket)and marked up for the dealership to pay its staff and make a healthy profit.

      Why would a manufacturer do this? Luxury car profit margins are huge (for the manufactuer, not the dealer). Lease manipulation is a way to offer a large incentive to the customer, which allows them to sell a greater volume of cars, and supply the certified used programs which allow the manufacturer to capture business through their parts and service operations. By incentivizing the cars this way, you avoid devaluing your brand with upfront cash incentives the way a 20% or $10k cash rebate would ruin your brand equity.


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