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