Sub-prime lenders aren't expected to leave the market, says Moody's, just pull back slightly. Image courtesy: EZAutoFinance.org.
U.S. auto sales got off to a slow start this year, and though they showed a modest rebound in March, industry analysts are questioning whether 2014 will continue to see the sort of recovery forecast for the American car market this year – especially if lenders begin reining in financing.
And that’s a possibility suggested by a new study by financial tracking firm Moody’s showing that U.S. subprime auto lenders are “exercising more caution,” especially when it comes to higher-risk customers.
But the study does not seem to indicates a wholesale slowdown, Moody’s concluded. It points to slower growth in non-prime lending by banks and credit unions, as well as so-called “captive finance” firms operated for or by the various automakers.
“Declining competition from non-traditional subprime lenders puts less pressure on independent finance companies to lend to weaker borrowers to maintain their lending volumes,” said Peter McNally, Moody’s Vice President – Senior Analyst. “If lenders maintain this caution, loan losses among newer loans could stabilize.”
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During the depths of the Great Recession, lenders all but abandoned the sub-prime sector – in fact, even some of the lowest-risk customers found it difficult to land loans and leases between 2008 and 2010. The situation has improved for borrowers in recent years, and that has been credited with helping spur a sharp upturn in the U.S. auto industry which collectively moved more than 15.5 million vehicles in 2013, the highest figure since the recession began.
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But there have been concerns that defaults and delinquencies might rise, especially on sub-prime accounts, if the overall economy continues to stutter along. That has led some lenders to raise sub-prime interest rates or simply pull back on the number of loans they’re offering.
Nonetheless, there are other indications “that lenders are still willing to take on increasing risk,” added Moody’s McNally. “So we don’t anticipate a major slowdown in subprime lending.”
That cautious optimism might be backed by the fact that more lenders are getting back into sub-prime. Wells Fargo, badly hammered by loan defaults during the recession, is slowly re-entering the sub-prime housing market, for example.
Overall automotive lending should remain high, according to the Moody’s study, at least through 2015, because of generally positive market conditions.
“The improving labor market, along with pent-up demand in the auto industry, will generate new customers. At the same time, persistently low interest rates, which give lenders low cost of funds, will entice lenders to keep making loans,” concluded McNally.