Lenders Snatch Back the Piggy Bank After Taking a Hit on Auto Loans

Steph Willems
by Steph Willems

April was the fourth consecutive month to see U.S. auto sales underperform compared to 2016, leading many to speculate that the long-awaited slump has finally arrived. New car sales aren’t the only thing slipping, as used vehicle values — diminished by a flood of off-lease stock and new car incentives — is on the same downward trajectory.

At the same time, the country’s biggest auto lenders have taken a look around and do not like what they see. No bank wants to be stuck with a low-value repossessed car, so purse strings are tightening across the United States. Securing that next loan just became harder.

Of course, this is the last thing any automaker wants to hear.

According to the Wall Street Journal, growing losses on defaulted auto loans have forced banks to dial back their generosity towards borrowers.

While the trend stands to hit subprime buyers the hardest, even those with good credit scores are starting to feel banks’ newfound caution. Wells Fargo recorded a 29-percent drop in auto loan originations in the past quarter, compared to a year prior. Santander Consumer USA saw a 21-percent drop in originations during the same period.

“It’s been an overheated sector,” Fifth Third Chief Executive Greg Carmichael told WSJ. “The auto business just isn’t as attractive right now.”

Annualized net losses on auto loans are up, hitting 10 percent late last year before dipping slightly. While the delinquency rate is on the upswing (especially among subprime borrowers), the reduction in used vehicle values plays a major role — banks are only recovering 51 percent of a repossessed car’s unpaid balance, according to S&P Global Ratings, down from 65 percent in 2011.

Fewer people being approved for loans, coupled with a glut of cheap used cars, should make a nervous auto industry even more pensive. The move to curtail auto loans comes as new car inventories soar. It’s a very different picture from the one seen over past several years, when new vehicles sales (and loan approvals) soared in the wake of the recession, though it has also been a long time coming.

[Image: Faris/ Flickr ( CC BY 2.0)]

Steph Willems
Steph Willems

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  • MrGrieves MrGrieves on May 04, 2017

    My Aunt who has marginal income, crushing debt, and a driving record that has resulted in her car insurance being cancelled on more than one occasion just leased a new Jetta SEL Sedan thru VW Financial Services. She ended up with a fairly low down payment and reasonable lease payments for 36 months. The credit spigots are running full flow right now...

  • TomLU86 TomLU86 on May 04, 2017

    We've been on the verge of a big mess for my entire adult life. Political Ideology has a lot to do with how one defines a mess. Taking ideology out, people with college debts owe more than they can pay (I think we are over a $1 trillion in the hole). Bad house and car loans (for houses and cars purchased) Our govt owes way more than it can pay (for past spending). On top of that, the USA was one of the first modern societies. WWII did not destroy our cities. So our water system--older, needs updating. Will cost hundreds of billions. Ditto the electric grid. We all see the potholes. They will get worse. Where will the money come from? The US of A cannot generate the wealth it needs to provide the lifestyle we as a society want/would like. (They used to say) Everyone wants to live an American. Today (collectively), Americans can't afford to live like Americans. Still, I enjoy this website :)

    • Lou_BC Lou_BC on May 04, 2017

      tomLU86 - I wish you were wrong but you aren't.

  • ED I don't know what GM is thinking.I have a 2020 one nice vehicle.Got rid of Camaro and was going to buy one.Probably won't buy another GM product.Get rid of all the head honchos at GM.This company is a bunch of cheapskates building junk that no one wants.
  • Lostjr Sedans have been made less practical, with low rooflines and steeply raked A pillars. It makes them harder to get in and out of. Probably harder to put a kid in a child seat. Sedans used to be more family oriented.
  • Bob Funny how Oldsmobile was offering a GPS system to help if you were lost, yet GM as a company was very lost. Not really sure that they are not still lost. They make hideous looking trucks, Cadillac is a crappy Chevy pretending to be fancy. To be honest, I would never step in a GM show room now or ever. Boring, cheap ugly and bad resale why bother. I get enough of GM when i rent on trips from airports. I have to say, does anybody at GM ever drive what everyone else drives? Do they ever then look at what crap they put out in style fit and finish? Come on, for real, do they? Cadillac updated slogan should be " sub standard of the 3rd world", or " almost as good as Tata motors". Enough said.
  • Sam Jacobs I want a sedan. When a buy a car or even rent one, I don’t want to ride up high. I don’t want a 5-door. I want a trunk to keep my stuff out of sight. It’s quieter, cars handle better, I don’t need to be at the same height as a truck. I have a 2022 Subaru Legacy Touring XT, best car ever, equipped as a luxury sedan, so quick and quiet. I don’t understand automakers’ decisions to take away sedans or simply stop updating them — giving up the competition. The Camry and Accord should not be our only choices. Impala and Fusion were beautiful when they were axed.
  • Spamvw I think you need to remember WHY the big 2 and 1/2 got out of the car business. Without going political, the CAFE standards signed into law meant unless you had a higher gas mileage fleet, you couldn't meet the standards.The Irony is that, the law made sedans so small with low roof lines, that normal people migrated to SUV's and Trucks. Now we get worse mileage than before.