Lending Curve

Contributing Author:
Mark Rappaport
President
Simplicity Division
EFG Companies

There have been several pieces of news this month which could prompt a little champagne and celebration. After struggling through a challenging first half of the year, the third quarter looks to be strong for anyone operating in the retail automotive space. U.S. light-vehicle sales rose 10% in August, the second straight month of higher volume, with positive sales across most brands.

Additionally, on September 19^th, the Federal Reserve shaved 50 basis points off the short-term benchmark interest rate, including a quarter point reduction in the general interest rate. But, don’t pop the Champagne cork yet. While this signals good news for auto loan volume, Cox Automotive cautioned the industry not to be too excited, indicating that consumers with lower credit scores will not see any relief. Subprime has reached a 10-year high and the analyst firm sees lenders requiring a higher premium to cover their risk.

Potentially in response to this concern, the New York Federal Reserve reflected that lenders relaxed access to loans for customers whose credit scores were subprime and in the lowest category of prime during the second quarter of this year.

As a result, auto loan and lease originations combined totaled $155.6 billion for the quarter, up 2.9% year-over-year. Keeping a cautious eye on the market, the New York Fed analysts are monitoring an increase in auto delinquencies. In the second quarter of 2019, loans that were 90+ days delinquent rose year-over-year by 4.2%. Continue reading →

Contributing Author:
Brien Joyce
Vice President
EFG Companies

The economy has been heavily featured in the news lately, with some pundits ringing the recession bell and others pointing to low unemployment and consumer confidence. Whichever way your divining rod is pointing, the fact remains that these economic indicators prompt savvy credit union lenders to be on alert.

From a retail automotive standpoint, first quarter numbers are validating the forecasted plateau/slight downturn in both new and used sales. According to the first quarter Experian statistics, new vehicle registrations were down 100,000 as compared to Q1 2018. Used vehicle registration took a steeper dive, dropping by 300,000 versus the same time frame.

As context, quarterly auto loan balances reached a record high in Q1 2019, jumping 6.5% year over year. The average new loan also hit a record high, surpassing $32,000, reflective of the continued high cost of vehicles and lack of OEM incentives. The monthly payment amount on those loans also hit a record, passing the $550 mark across all loan types. The interest rate on all risk categories averaged over 6%. Credit may be cheap at the Federal Reserve lending window, but it is holding firm against pressure at the auto loan desk.

A few anomalies also appeared in Experian’s first quarter data. Surprisingly, new auto loan terms decreased while used terms increased in Q1 2019. It is likely that even with low unemployment in many areas of the country, job security and available discretionary income remains low. While longer term loans continued to dominate the market, new loans with shorter terms experienced growth. This factor may be attributed to a generational demographic. Millennials and GenZ tend to be debt averse, having experienced the fallout from the Great Recession first hand. As these consumers gain a credit history, they could become an interesting short term/low payment niche market if the data continues to follow the trend. Continue reading →

Contributing Author:
Brien Joyce
Vice President
EFG Companies

We’re halfway through a very interesting year in the auto-lending space. If you had planned for slightly lower auto loan volume, rising delinquency rates, and an uncertain economic outlook, congratulations! You’ve planned for this situation and hopefully are managing well. Going forward, you’ll need to stay the course. The forecast for the second half of this year and all of 2020 appears to be equally bumpy.

The Economy and Vehicle Prices

On June 19^th, the Federal Reserve chose to keep interest rates steady in the near term, but retained an option to cut rates as economic risks mount and inflation remains stuck below their target. Many officials on the Fed’s policymaking committee expect to lower rates before the end of the year amid continuing trade tensions and slowing global economic growth. Essentially, the Fed is preparing for the economy to take a hit and is keeping an interest rate ace up their sleeve.

There are other indicators of a stalling economy. A subdued global economy, increased corporate stock buybacks, and some spikes in lay-offs will keep business bumpy throughout 2019 and into 2020. Significant peaks and valleys in the stock market have caused unrest. The good news is a recession may still be a few years off. In fact, a brief inversion in Treasury notes prompted investors to predict another recession in two to three years. Continue reading →

Lending Curve

Buy The Champagne – But Keep It on Ice!

Growth vs. Risk in Today’s Economy

Finding Opportunity in Economic Uncertainty

The Economy and Vehicle Prices