3 Warning Signs for the Auto Lending Market
A decade ago, the imploding housing market wreaked havoc on the U.S. economy, driven by a distinct set of market conditions that have been widely studied and discussed by policymakers and pundits alike.
In 2018, similar conditions are surfacing in the auto lending market. Together, these disturbing trends raise questions about the auto finance industry’s future and should prompt discussion about how to prepare for a potential crisis.
Warning Sign #1: Risky New Products
As the market has grown in recent years, lenders have become increasingly reliant on new, unproven loan products to continue extending credit to consumers. While some of them may be harmless, the risk posed by untested products creates challenges that are, of course, unforeseeable.
Warning Sign #2: Early Delinquencies
The mortgage crisis grew out of control as delinquencies snowballed, and delinquency will always be a key benchmark of any lending market’s health. So it’s significant that, as reported by subprime auto loan defaults hit 5.74% in February 2018, eclipsing even the mortgage delinquency rates seen during the 2008 crisis, according to Fitch Ratings.
Warning Sign #3: Small Subprime Lenders
Perhaps one of the most troubling signs is the collapse of several small subprime lending houses, which service the riskiest loans and may, therefore, serve as bellwethers for the rest of the industry.
Whether or not we’re headed for an auto lending crisis, there remains a pressing question: Are vehicle loan servicers prepared for a sharp increase—or any increase—in the number of delinquencies?
As the U.S. market for new cars intensifies in the currently robust economy, auto finance companies should be preparing for the possibility of a broader crisis, especially if overall economic growth slows.
The value of all outstanding auto loan balances surpassed $1 trillion two years ago, according to Experian Automotive, and an auto lending crisis would have drastic effects that need to be discussed now, while there is still time to adapt.
Download LenderLive’s new whitepaper, “Warning Signs on the Road for Auto Loans,” to learn more about:
- Why longer loan terms could be a bad sign for the auto lending market
- The latest consumer research in the auto lending space
- How to prepare for the potential regulatory fallout of a lending crisis
