Plateau in U.S. auto
sales heightens risk for lenders: Moody's
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[March 27, 2017]
By Nick Carey
(Reuters) - As U.S. auto sales have peaked, competition to finance car
loans is set to intensify and drive increased credit risk for auto
lenders, Moody's Investors Service said in a report released on Monday.
"The combination of plateauing auto sales, growing negative equity from
consumers and lenders' willingness to offer flexible loan terms is a
significant credit risk for lenders," Jason Grohotolski, a senior credit
officer at Moody's and one of the report's authors, told Reuters.
Motor vehicle sales have boomed in the years since the Great Recession.
U.S. sales of new cars and trucks hit a record annual high of 17.55
million units in 2016.
Industry consultants J.D. Power and LMC Automotive on Friday reiterated
their forecast for a 0.2 percent increase in sales in 2017 to 17.6
But Moody's says it expects U.S. new vehicle sales to decline slightly
to 17.4 million units in 2017.
In its view, that would mean lenders will be chasing fewer loans, "which
could cause them to further loosen loan terms and loan to value
Over the past several years, lenders have supported automotive credit
growth with "accommodative financing," including longer loan terms, the
"With every successive year, lenders' profitability is getting thinner
and thinner, and their credit losses have been growing," Grohotolski
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Automobiles are shown for sale at a car dealership in Carlsbad,
California, U.S. May 2, 2016. REUTERS/Mike Blake/File Photo
In the first nine months of 2016, around 32 percent of U.S. vehicle
trade-ins carried outstanding loans larger than the worth of the cars, a
record high, according to the specialized auto website Edmunds, as cited
Typically, car dealers tack on an amount equal to the negative equity to
a loan for the consumers' next vehicle. To keep the monthly payments
stable, the new credit is for a greater length of time.
Over the course of multiple trade-ins, negative equity accumulates.
Moody's calls this the "trade-in treadmill," the result of which is
"increasing lender risk, with larger and larger loss-severity exposure."
To ease consumers' monthly payments, auto manufacturers could subsidize
lenders or increase incentives to reduce purchase prices, though either
action would reduce their profits, the report said.
Lenders could further lower annual percentage rates and keep extending
loan terms, though the latter would increase their credit risk, it
(Reporting By Nick Carey)
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