Faced with less disposable income, higher taxes and more expensive vehicles (in most cases), loan terms in the Canadian market has gradually shifted to one where bi-weekly and even weekly payments have become the advertised norm, with 72, 84 and 96 month loans appearing as a fixture of the new and used vehicle marketplace. And with household debt levels reaching record heights in Canada, the chart above should be deeply concerning.
The latest Q2 2014 data from Experian was released this week, and key metrics like repossessions, loan delinquencies and outstanding balances have all seen increases.
New technology is allowing buyers with no credit score – due to a lack of credit history or a personal bankruptcy – to get vehicle financing via examination of documents like the payment history of their cable or cell phone bill.
The Detroit Free Press paints a pretty clear picture of the automotive lending landscape: auto loan terms are rising, with 1 in 5 loans now lasting longer than 6 years. At the same time, the average credit score for those taking out loans is dropping. Ominous signs for a car market that’s running on the hype of a perpetually increasing SAAR, right? Well, not according to some.
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.
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.
Long-term auto loans, leasing and sub-prime financing all saw increases year-over-year from 2011 to 2012, according to a report by Experian, a consumer credit rating agency. While typically a dry and detail-oriented subject, the area of auto financing gives us some insight into the nature of the new car market and even the economy itself.
Your personal information is valuable.
When I liquidated vehicles for Capital One, we typically examined over 14,000 variables before lending out our money to a customer.
Any customer. A credit card. An automobile. A commercial loan. It didn’t matter. We needed to get to know the economics of you first.
All of the low rates and big profits were dependent on buying your personal information, and then crafting decision models and metrics to determine your personal risk.
Our success in auto finance generated low rates for our customers and low delinquencies for our investors. But they both could have been far lower.
Freshly minted college graduates usually aren’t the best credit risk – especially in today’s unpermissive environment when it comes to jobs. BMW thinks otherwise and declared that a good student needs a bimmer for graduation. On credit. Real credit. No more phony college credits. This is the real thing! (Read More…)