Moody's: Auto Loan Standards Will Be Relaxed in 2014. Leases to Increase As Prices Climb

TTAC Staff
by TTAC Staff

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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  • 28-Cars-Later 28-Cars-Later on Nov 29, 2013

    "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.

  • CarPerson CarPerson on Nov 30, 2013

    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.

    • Exit Exit on Dec 03, 2013

      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.

  • Ronin It's one thing to stay tried and true to loyal past customers; you'll ensure a stream of revenue from your installed base- maybe every several years or so.It's another to attract net-new customers, who are dazzled by so many other attractive offerings that have more cargo capacity than that high-floored 4-Runner bed, and are not so scrunched in scrunchy front seats.Like with the FJ Cruiser: don't bother to update it, thereby saving money while explaining customers like it that way, all the way into oblivion. Not recognizing some customers like to actually have right rear visibility in their SUVs.
  • MaintenanceCosts It's not a Benz or a Jag / it's a 5-0 with a rag /And I don't wanna brag / but I could never be stag
  • 3-On-The-Tree Son has a 2016 Mustang GT 5.0 and I have a 2009 C6 Corvette LS3 6spd. And on paper they are pretty close.
  • 3-On-The-Tree Same as the Land Cruiser, emissions. I have a 1985 FJ60 Land Cruiser and it’s a beast off-roading.
  • CanadaCraig I would like for this anniversary special to be a bare-bones Plain-Jane model offered in Dynasty Green and Vintage Burgundy.
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