Auto Lending Facts & Its Correlation With Economy
Understanding the auto lending sector with respect to the current economic condition of the country is essential for all borrowers. This will help them to decide when and whether it is necessary to take out a loan and be able to repay it on time.
However, understanding this segment is not at all an easy task, especially when the current economic climate is pushing a few financial institutions and lenders to the edge so much so that they are about to tumble down the metaphorical cliff.
Just like a rock climber is pushed to the edge and hang precariously restricting a fall due to absence of proper equipment, the credit unions are also at a crux, especially those that do not have the proper tools and software to manage their operations.
- These tools and software helps the auto lending companies to manage their risks effectively, easily and wisely.
- It helps them to follow a solid and sound practice that they need in order to serve the customers at its best or suffer the dire consequences of increased repossessions.
Among all lenders, the area of automobile loans is the one that needs to focus more because it is the basis of the economy of a country.
Looking at the current scenario
If you look at the current auto lending scenario more closely you will notice a few significant changes. A few of these changes have affected the auto lending sector in a positive way, others have affected it in a negative manner and few others have not made any effect at all. A few of these changes are:
- A significant drop in the price of gas recently
- Speedy devaluation of low mileage cars that prevails and
- Record rates of negative equity for the buyers of the new cars.
When you take a look at the current economic environment you will see that all these have resulted in a palpable sense of crisis in the operation of the banks, financial institutions, other alternative sources such as Liberty Lending and the credit unions.
The disconcerting features
To say at the least, all these may seem to be a little disconcerting. This is due to several facts such as:
- The sagging confidence of the consumers
- The curbs in retail production
- The domino effect that has spread into job layoffs and
- The excess pressure on homeowners.
Out of all these factors, the last one seems to be more concerning. According to several research reports it is seen that one in every six homeowners is found to be struggling with their mortgages. This comes as no surprise to the fact the rate of auto loan delinquency is currently on the rise.
As a matter of fact it is found that there is a 50% increase in the auto loan delinquency in the last year amongst all delinquent credit union loans including mortgages.
Changes in the market
Considering the current auto lending market scenario, the situation can be best explained by the old saying: When the going gets tough, the tough gets going. Considering the time now, it is only the tough who will be able to survive the fierce competition of the auto lending market.
- According to the report of USA Today, most of the lenders are pulling back from auto lending due to the rising delinquency rate in big ways. This is primarily the result of the lenient credit standards that the economy has witnessed in the past. However, these are no longer being employed.
- According another report of the Federal Reserve Board on the survey on bank lending practices, the financial regulators are tightening the consumer lending standards. As a result more than 65% of the domestic banks are reported to have amended their lending standards on all types of consumer loans apart from credit cards including auto loans.
All lenders are demanding larger down payments. In addition to that, most of the finance companies are also pulling back from financing additional such as:
- Sales taxes
- Remaining debt on values of trade in and
- Extended warranties.
Therefore, the loan offer of 110% of Loan to Value that was offered previously is not found anymore.
Good news for credit unions
Considering all these changes, there is good news for the credit unions in this. These institutions that are owned by its members have always had loyalty on their side. With the decrease in confidence of the consumers in traditional loans, they are highly likely to flock to these credit union lenders to seek a loan.
When it comes to automobile loans, American homeowners are not different. It is found that:
- More than 40% of the new car buyers on a loan are upside down on their car loan
- The average negative equity is found to be $2,200 and
- This negative equity has nearly doubled amongst the average vehicle buyers as it was in 2000.
These facts are alarming and naturally very concerning to the auto financing companies and as a result they have pulled back. The fact that multiple research organizations such as USAToday.com, J.D. Power and Associates, and Edmunds.com have come up with almost similar results, makes the situation more concerning and leave no scope for any doubts.
Reverting to the basics
In order to survive this competitive market and tough economic environment, the auto lending companies must revert to the basics. This includes judicious underwriting practices. This is something most of the lenders as well as the consumers are well aware of. It depends primarily on the 3 Cs of lending: collateral, capacity and character.
- Collateral: This helps in the underlying value. However, in here comes the loan-to-value ratio as vehicles whether it is a small car, SUVs, vans, crossovers, or trucks are all fast depreciating.
- Capacity: This determines the ability of the consumers to repay the loan. It is important for the credit unions to know whether the borrower will have the job in the future to repay the loan considering the economic climate.
Lastly, the history of the person will tell about the character and willingness to repay the loan.
Loaning is all about trust and considering the current economy, it is all about the basics.