The auto lending paradox

In spite of a strong economy, lenders need to be ready to recoup their investments.

The good news? Strong growth in the U.S. economy has the auto industry reaping the rewards. Higher average loan amounts and increased sales in the luxury sector have made auto lending the fastest-growing asset class, with 28 million vehicles sold and $1.2 trillion in total balances at the end of 2018.

The bad news? Auto sales aren’t the only thing that’s growing. Loan terms are becoming longer (some as high as 10 years!) and over 20 percent of total lending is now being extended to subprime borrowers. This means many people are buying vehicles they can’t really afford, which helps explain why delinquency rates are on the rise with over 2.7 million averaging between 30- and 60-days delinquent. In 2017, over 1.8 million units were repossessed, which was the highest volume since 2009.

What’s behind this dichotomy and what does it mean for lenders?

 

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