The Truth About Cars » Auto Loans The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Wed, 23 Apr 2014 16:58:35 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Auto Loans Record Auto Loans Taken As Interest Rates Drop Fri, 06 Dec 2013 13:00:14 +0000 01-cadillac-dealership1

Though the calendar is about to change to 2014, it appears to be 2007 all over again in dealer lots and showrooms nationwide as a record number of auto loans with low interest rates were signed during the third quarter of 2013.

According to Experian, the average amount taken out for a new car loan this quarter was $26,719, the highest amount financed since the start of the Great Recession in 2008. As a bonus, each loan for a new car holds an interest rate average of 4.27 percent; used car loans, on the other hand, hold an average rate of 8.63 percent.

Reasons for the record loan amounts include the rising cost in new cars overall due to buyers adding extra content and features that best suit their needs and wants, as well as interest in luxury vehicles, whose sales have gone up 11 percent this year due to leasing programs feeding fuel to the fire.

In exchange for taking out huge loans, consumers are opting to stretch out their notes for as long as possible to keep payments low; the average payment in the third quarter of 2013 is $458. Around 40 percent opt to pay off their loan for 65 months, while 19 percent choose to spend anywhere from 73 to 84 months doing the same.

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Moody’s: Auto Loan Standards Will Be Relaxed in 2014. Leases to Increase As Prices Climb Fri, 29 Nov 2013 12:00:12 +0000 11977632-subprime-lenders-car-get-you-guaranteed-approval-on-bad-credit-auto-loans

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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Mainstream Press Finally Worried About Cheap Car Loans Mon, 14 Oct 2013 16:00:41 +0000 Subprime-Auto-Lenders

Months after TTAC started to relentlessly bleat about the glut of money flowing into the auto loan sector, the mainstream media is finally taking notice. Automotive News is finally expressing some worry over the factors that we’ve been discussing for some time: car loan terms are getting longer (to help keep payments low), subprime lending is increasing and an expected rise in interest rates could put an end to the new car market’s exuberant performance.


This phenomenon is being primarily driven by low-interest rates, which allow consumers to finance vehicles cheaply, even as transaction prices creep upwards. Meanwhile, financial institutions are happy to provide the loans, particularly to those with poor credit, since they can be securitized and sold off to fixed income clients looking to get decent yields in the same low-interest environment.

The topic of auto financing has been rather divisive, to say the least, and we at TTAC remain bearish on the outcome, though the likelihood of any systemic risk seems to be diminished as OEMs choose to expand existing factories rather than build new ones. But we’re hardly alone anymore.

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Fed Reports Auto Loans at Six-Year High, Average Balance Up, Delinquencies Down Mon, 26 Aug 2013 15:16:58 +0000 car-loan-for-bad-credit

According to a report issued last week by the U.S. Federal Reserve Bank of New York, car and light truck loan originations have reached a six-year high. Automotive News reports that for the second quarter of 2013, new loans went up 11% to $91.8 billion, including consumers with all credit ratings. U.S. light vehicle sales were up 9% for the quarter from last year.

The Fed said that the biggest year to year change was in the 621-660 credit score range, just below “prime” rankings. That tranche rose 16% to $12.1 billion. Loans to those with worse credit, a score below 620, were up ~11% from 2012 to $21.2 billion.

Among all loan originations, according to the Fed report, the biggest year-over-year percentage increase was in the 621 to 660 credit score range, just below prime risk, which rose 16 percent in the second quarter to $12.1 billion. Loans to borrowers with credit scores of 620 or below increased about 11 percent from a year ago to $21.2 billion.

Loans are only now reaching what the Fed describes as normal levels following the financial crisis of 2008. “While originations to borrowers with the lowest credit scores have increased, they are just recently approaching historically normal levels and are below those that we saw during the boom years leading up to the crisis,” the report said.

Total auto loans exceeded the previous quarter for the ninth successive financial quarter since Q3 of 2008, with more than $800 billion borrowed.

Average loan balances have risen to $13,435, up 4.5% from 2012 and up 1.3% from the previous quarter. As those with less than prime credit ratings return to the market, their loans, which tend to have higher initial balances, are putting upward pressure on the average balance.

Though less creditworthy customers are borrowing more money, they appear to be making their payments. Payments that were at least two months in arrears were flat from last quarter, going from 0.79% to 0.80% of car loans, according to the TransUnion credit agency. Both of those figures were down from 0.88% in the first quarter.

Peter Turek, TransUnion’s VP, said the data was good news. “It’s encouraging to see consumers take on more auto debt while delinquencies remain low.”

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97 Months And Running Mon, 15 Apr 2013 11:00:14 +0000

8 years to pay off a car? A report by the Wall Street Journal claims that in Q4 of 2012, the average car loan stretched out to 65 months, or just over 5 years. Loan terms were being stretched out over increasingly longer terms too, with credit firm Experian reporting that nearly 1 in 5 car loans had terms between 73 and 84 months long, with some stretching for as long as 97 months.

So why stretch out loans for such a long period of time? Per the WSJ

“[the] 75-month loan illustrates two important trends rippling through the U.S. auto industry. Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.”

Among the culprits cited by the WSJ are increased credit, low delinquincy rates on car loans and, according to banks, minimal downside as far as auto lending goes.

Melinda Zabritski, director of automotive credit for Experian, said the greater availability of credit is helping the surge in new car sales. The percentage of subprime loans isn’t far below the record level of 2007, and the length of loans is growing, she said…With increased competition between the banks for business, offering loans longer than 72 months, or subprime loans is one way to compete for new borrowers. “Consumers tend to be monthly payment buyers. One way that lenders compete is to offer longer term loans,” Ms. Zabritski said.

Interestingly, Zabritski claims that buyers qualifying for the longer loans tend to be those with good credit scores buying more expensive vehicles. But what nobody answered is “where is all this credit coming from?” As per our last report on auto lending, the appetite for auto back securities is enormous, and Wall Street cannot get enough of them. Sub-prime loans in particular are a favorite. At this point, nobody, not even Zabritski, is denying that the expansion of credit for automobile buyers is driving new car sales. The question is, what happens when the music stops?

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How A New Generation Of Sub-Prime Auto Financing Could Cause Another Catastrophe Fri, 05 Apr 2013 14:40:53 +0000

March was the 5th straight month of a SAAR above 15 million vehicles.  Industry analysts have explained the strength of the market in a number of ways. The need to replace older vehicles is one (new car sales were hit hard during the recession as consumers held on to their vehicles for longer. This also caused used car prices to skyrocket, something TTAC has been documenting), while others have cited increasing fleet demand, and the desire to replace vehicles damaged in Hurricane Sandy.

But one factor that is just starting to get attention outside of TTAC is sub-prime financing. Sub-prime lending, which involves giving high-interest loans to customers with poor credit scores, is driving the SAAR in a big way, by letting buyers with poor credit purchase new cars. In turn, the sub-prime bubble is being driven by Wall Street, whose clients cannot get enough of financial instruments backed by sub-prime auto loans.

On the surface, it seems unbelievable. Unemployment is at 7.7 percent, and even higher according to some pundits. Taxes are going up, wages are stagnant, the economy hasn’t really recovered according to many. And yet auto sales – for many people, the second biggest purchase they’ll ever make – are on a hot streak, rebounding back close to pre-recession levels.

Sub-prime loans, defined as a loan given to anyone with a credit score under 660, are now bigger than ever. In Q2 of 2012, new car sub-prime loans accounted for a quarter of of all loans, while 56 percent of used car loans went to sub-prime buyers.There’s even a new category called “deep subprime”, for auto loans issued to buyers with credit scores below 600. These loans account for nearly 11 percent of all car loans, despite the fact that a 600 credit score is considered abysmal.

A recent Reuters report detailed the usual routine of a sub-prime loan; a borrower with a poor credit rating is approved for a loan, often carrying an exorbitant interest rate hovering around 20 percent. In the Reuters story, the buyer agreed to finance a $10,000 2007 Suzuki at 21.5% interest using a shotgun (valued at $700) as his down payment. The buyer, stretched thin by various debts, including the car loan, ended up declaring bankruptcy. Another report by the Los Angeles Times outlined how unscrupulous used car dealers would issue sub-prime loans, knowing that their customers would default, wait for them to default, and then repossess the car and re-sell it, repeating this process over and over again.

In addition to the decreasing credit scores of car buyers (The Motley Fool reports that the sub-prime buyer’s average credit score dropped 9 points in 2012 compared to 2011), monthly payments have stayed static, due to 77 percent of loans lasting for longer than 5 years. This tactic allows buyers to manage the same monthly payment but borrow a greater amount, and thus able to afford a more expensive car without feeling more of a hit to their pocketbook.

Extending loans to unqualified buyers wantonly would seem like a poor business practice on the surface, but the demand for sub-prime loans isn’t just coming from consumers. Wall Street is also playing an enormous part in the practice. According to the New York Times, growth in securities backed by auto loans has been enormous. In 2008, investors bought $2.17 billion in auto loan securities. In 2011, that figure exploded to $11.7 billion.

The rationale behind the massive growth in auto loan securities can be linked to the Federal Reserve’s policy of Quantitative Easing. QE, which involves buying bonds and Treasury Secuities en masse, has injected liquidity into the market and kept interest rates artificially low. This has allowed banks to charge near-record low interest rates on all car loans, while also reducing yields on traditionally safer investments like bonds. Sub-prime car loans, packaged and sold into securities, are seen as riskier, albeit with the potential for greater return. And with hedge funds and institutional clients looking for a greater return on their money, auto loan securities have become the instrument of choice for a number of entities – even Google is investing in these instruments, after being frustrated by low returns elsewhere.

And just like the 2008 mortgage crisis, these sub-prime auto loans are being packaged and sold as AAA rated bonds. As the Los Angeles Times reports, the number of loans packaged and sold as a securities is in the tens of thousands. The thinking goes that even if some of the loans are delinquent, there are plenty more that will make the security safe. And like sub-prime mortgages, the securitized auto loans are being divided up into tranches, with demand for the riskiest tranches being strongest.

Unfortunately for American consumers, the biggest players in sub-prime auto financing have significant ties to domestic auto makers. A report by Reuters names Santander, which is Chrysler’s auto financing outlet, and GM Financial as the two largest sub-prime auto lenders in the United States. Santander alone accounted for 53 percent of all sub-prime financing – and Santander’s expertise in the field was apparently one reason that Chrysler decided to partner with the Spanish bank.

While both Chrysler and GM use Ally Financial for their prime loans (which are issued to qualified buyers), GM has its own seperate sub-prime arm, known as GM Financial. In Q1 2012, some 93 percent of GM Financial’s loans were to sub-prime buyers, up from 87 percent in Q4 2010. During that same period, loans to the least qualified buyers – those with FICO scores under 540, were up 79 percent. GM Financial’s delinquent loans also rose by some $200 million in 2012, to $933 million – higher than Ford Toyota and Honda’s combined delinquencies.

The situation in auto-loan securities has eerie shades of the 2008 mortgage crisis across the board: the eager distribution of not just sub-prime loans, but “deep sub-prime” loans to borrowers with the worst credit ratings. The securitization of auto loans and the hunger for the riskiest tranches of these securities. And the “AAA” rating of even the most egregiously crappy securities.

In light of these factors, it’s worth reflecting on how much of an influence sub-prime auto loan securitization is having on the lofty heights being reached by the new car market. The last time America experienced the bursting of an asset bubble, auto makers were stuck with excess capacity and significant overcapacity. Combined with a sudden contraction in consumer credit, these factors nearly brought America’s auto makers to their knees.

The current situation is not directly comparable to the mortgage crisis of 2008, but bares too many parallels for us to ignore. It would be the ultimate irony if another systemic crisis occurred, due to securitizied auto loans. They very instruments used to by auto makers to help spur sales growth will have ended up crippling them yet again.


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Is China Headed For Oversupply? Not If The Credit Boys Can Help It Wed, 28 Apr 2010 17:01:58 +0000

Anywhere there’s a gold rush, competitors have to worry about getting caught on the bust-end of a boom-bust cycle. With the growth of China’s car market projected to roll all the way to about 20m units annually, automakers hoping to cash in on booming sales have to wonder whether their investments in Chinese capacity will actually be used efficiently. And, as the European market is learning, government consumer incentives can also inflate projections, only to create a collapse in demand after they are phased out. These factors have combined to create a bit of a panic about the possibility of a Chinese-market oversupply, as financial analysts start reigning in automakers’ rampant Sino-optimism.

The background for fears of a Chinese oversupply can be found in the huge capacity expansions planned by some of the auto industry’s biggest global players. China’s heavyweight, Volkswagen, is planning on spending nearly $6b expanding its Chinese capacity by 2012. Nissan is expanding capacity by 70 percent, and Toyota and Hyundai are building new plants as well, while domestic competitors continue to ride growing sales to further expansion as well. After all, Chinese sales grew over 45 percent last year, and are projected to grow another 20 percent this year. Why wouldn’t more factories be a good idea?

The answer to that lies in the Chinese government’s tax credits for vehicle purchases. BusinessWeek reports that China had cut tax rates on cars with engines of less than 1.6 liters displacement to five percent last year. But with sales booming, China has already raised that rate to 7.5 percent in December, and will likely raise it back to its previous ten percent level by the end of this year. And though an increase of 2.5 percent doesn’t seem like much, consider that this incentive targets the lowest end of the market, where much of China’s auto sales volume growth is expected. And where incentives make the most impact.

But with car sales in the rest of the world still suffering from an economic crisis hangover, executives aren’t anxious to contemplate the possiblity of a Chinese oversupply. Honda CEO Takonobu Ito opines:

China’s motorization is reaching the masses. Even after the tax break ends, demand shouldn’t drop very much.

GM’s Kevin Wale agrees, saying:

Every time the government changes their policy, it will have some impact, but the underlying demand is increasing at a very fast rate.

Even BMW’s Norbert Reithofer is joining the chorus, saying:

We will expand very dynamically in China even if the government takes that action

Get the picture? Meanwhile, the other side of the story comes from financial analysts like IHS Global Insight’s Paul Newton, who warns that even if the government doesn’t raise tax rates,

there is a fear that amid all of this investment and stellar growth, the vehicle market could start to overheat. The carmakers vying for market share in China may not want to admit it, but this risk is becoming a very real concern.

And Newton’s not the only one playing Cassandra in the face of strong growth in Chinese sales. MarketWatch reports that JP Morgan has downgraded several of China’s domestic automakers, including Dongfeng, Brilliance and Great Wall, on fears that the Chinese market:

can suffer from oversupply risks once the demand for small cars starts to soften as the stimulus policy’s effect starts to taper off

And UOB Kay Hian analysts raise another potential problem that will ring very familiar to students of China’s economic expansion: raw material supply issues. MarketWatch reports:

[Chinese] car makers may be particularly hard hit by those price cuts because of higher production costs, with steel prices in China expected to “surge in tandem with imported iron-ore prices,” the UOB Kay Hian analysts said. They warned that Chinese autos have an “unfavorable risk-reward balance,” and said they believe auto stocks are “unlikely to outperform the market in the next 12 months.”

But don’t worry too much… Americans are experts at beating demand out of even the most challenged markets, and they’re here to help. Sort of. According to Automotive News [sub], GM and Ford see only one major problem with the Chinese market: they pay cash. With 90 percent of Chinese-market sales taking place without financing (thanks to China’s impressive savings rates), Detroit’s finance boys see opportunities to not only unlock demand amongst poor, rural Chinese consumers, but also to get cash buyers to upgrade to a more expensive vehicle (making tax credits on entry-level vehicles less relevant). And it’s not just Ford and GM that are counting the interest dollars to be made on auto finance: Geely, Guangzhou, Beijing and other domestics are opening finance units as well.

If these firms can overcome China’s savings-oriented, pay-cash consumer culture by making auto loans more accepted and accessible, analyst fears of an oversupply could well be a false alarm. If the history of America’s auto industry (especially the part between the Model T and the rise of GM) teaches us anything, it’s that the cash-only, basic-transport market eventually gives way to a credit-driven, social-status market. There’s no reason to believe the same won’t be the case in China.

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Congressional Oversight Panel: Why Did We Bail Out GMAC Again? Fri, 15 Jan 2010 19:33:28 +0000

The TARP bailout of GM finance partner GMAC is being criticized by a congressional oversight panel [full report in PDF format here], reports the Detroit Free Press. The panel alleges that the Treasury

has not yet articulated a specific and convincing reason to support the company… It has never stated that a GMAC failure would result in substantial negative consequences for the national economy. If Treasury has made such a determination, then it should say so publicly.

There are plenty of possible explanations for why GMAC was bailed out. The most obvious is that it was part and parcel of the auto bailout. GM’s dependence on leasing and finance deals as well as the inability of GM dealers to get floorplan financing on the public markets made GMAC a crucial component of any rescue of General Motors and Chrysler. As the report notes

Treasury has stated that if it refused to support GMAC after providing assistance to GM and Chrysler, it would undermine its own investments in the automotive companies.

The tin foil hat crowd might point to Cerberus’s “voluntary” decision to walk away from Chrysler, and say that Cerberus-owned GMAC was bailed out as a quid-pro-quo for that “sacrifice.”

Either way, the report’s section on GMAC concludes:

It does not appear that the support has been made on the merits of the investment, particularly given GMAC’s recent statements that it anticipates reporting fourth quarter 2009 losses of approximately $5 billion…

Moreover, GMAC has received different treatment from all other financial institutions that were subject to the stress tests.  Unlike other institutions, it was subjected to additional stress tests after the initial stress test results were released in May, and unlike other institutions, its capital buffer requirements were revised in light of this second round of tests.  GMAC was the only institution that was allowed to benefit from post-May improvements in its financial position and in related sectors of the economy.  In the face of criticism about the merits of saving GMAC, Treasury owes the public a more detailed and convincing explanation not only of its rationale for providing substantial assistance to GMAC, but also of its rationale for treating GMAC differently than other stress-tested institutions.

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