Auto Lending Industry May Get Stricter with Underwriting Standards
- November 21, 2017
- Posted by: Andrew Rombach
- Category: Auto Loan News
As Americans fall further behind on their car loan payments, auto lenders and other auto loan providers are looking to tighten up their lending standards. Prime and subprime car loans are a good source of income for the banks when the economy is hot, but it can be a source of losses if people are struggling to repay, especially if they’re taking out riskier, long-term loans in the first place.
In a Business Insider report, data predicted a potential tightening in underwriting in the auto lending industry. If credit gets a bit tighter, consumers may pull back on purchasing automobiles, reducing the demand for auto financing in general.
After a record year for both new and used auto sales in 2016, lenders started to notice a deterioration in the quality of the overall car loan book. According to analysis from the Fed’s Senior Loan Officer Survey, the trouble all started in the second quarter of 2016. Some banks got spooked after record numbers of longer term loans and subprime loans started to comprise a greater portion of the auto loans in general. In the third quarter of last year, banks tightened their lending conditions to stave off loan losses.
Lenders have many tools to reduce their risk in the auto loan market, and the Fed’s report illustrated a few popular choices from the top banks. One of the simplest strategies is to increase the minimum down payment requirement. A bigger contribution from the buyer (and less from the bank) makes the loan safer from the lender’s perspective. Another easy fix to a “loose” lending market is demanding higher credit scores, or holding greater credit standards, to get a car loan. Your credit score helps the bank decide whether you are likely to repay your car loan. Higher scores are less likely to default on their payments.
However, some car and truck manufacturers may rely on easy credit to help the public afford their new vehicles. When lending standards are tight, it’s much harder for the Fords and GMs of the world to hit their sales targets. Worse, the inventory costs of vehicles are quite high. No one can afford to have their money tied up in a vast collection of last year’s models sitting outside on a lot, waiting to be sold.
Despite the changing lending environment, it may not have as big an impact on the young car buying generation as originally thought. Millennials don’t need to own a car like their parents’ generation, and rideshare apps makes life easier for people to avoid vehicle ownership. Some potential car buyers, especially those that already own a car through financing, may not be ready for an auto loan, given that Americans owe over $1 trillion on their car loan balances.