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Major Banks are Withdrawing from the Auto Loan Sector Forward   



Major Banks are Withdrawing from the Auto Loan Sector

SCCU
July 12, 2017


 
Roughly 1.2 trillion dollars is owed on American vehicles. Auto loans regularly rival student loans in amount for the average buyers, but their shorter terms and higher interest rates result in higher monthly payments that borrowers may miss, but higher profits for lenders. Yet lenders are cutting back on the number of new car loans or even seeking to get out of the auto lending business. Let’s look at the reasons why the major banks are withdrawing from the auto loan sector.

Equal Returns with Fewer Risks

 For many lenders, other types of loans offer equal or better returns with less risk of ending up with a beater car with a $10,000 debt against it. And their concerns about the risk are valid since subprime lending moved from housing to car loans after the 2008 crash, resulting in many who couldn’t really afford it receiving car loans with long payback periods to keep payments low.

Banks responded by choosing to lend to equally risky but more profitable credit card debt, which doesn’t bring the hassle or cost of selling a car of little value. They also started lending to homebuyers and enjoying higher security because people will skip on other debt payments to make sure they keep a roof over their heads. Those who want to buy a vehicle with less than stellar credit or refinance a current auto loan find the big bank doesn’t want to offer a refinance, pushing them into alternative auto refinance solutions whether with the local credit union or expensive loans with second tier institutions.


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The Declining Asset Value Ratio

Another reason why lenders are moving away from car loans is the declining asset value relative to the average loan. Repossessing a three year old car may result in a sale price less than the vehicle is worth, but pursuing a judgement for the $500 to $2,500 deficit is worth the effort and likely to be paid through wage garnishments.

Repossessing a seven year old car on an eight year note weighed down by the “negative equity” of the prior car loan results in collection costs, legal costs and disposal costs of hundreds of dollars to perhaps recoup two thousand dollars at sale and trying to pursue the borrower for a $3,000 to $10,000 debt. The return on the invested effort isn’t worth it, especially when compared to the cost of collecting on past due credit card debt or foreclosing on a house and receiving more than the mortgage amount at auction.

Decreasing Asset Value

Another issue lenders are facing is the literally decreasing value of the asset securing the loan, the car. Used car prices fell 8% last year because of relatively high supply and declining demand since most drivers either drive the wheels off their car or buy a new replacement vehicle. When a $5000 repossessed car is worth $500 less due to just market demands, the lender risks failing to break even at the auction through no fault of their own.

This is a new risk to lenders, and it is one they want to mitigate. Auto lenders continue to service loans they have already issued, but the decreasing value of the asset due to factors beyond their control, and aside from wear and tear, are pushing many to stop issuing car loans. This forces current auto loan customers into alternative auto refinance solutions, whether dealership financing, credit unions, regional banks or crowdsourcing.





 


 
             
 
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