Stricter Auto Loans Require Higher Down Payments

A sudden drop in automotive sales has raised concern amongst economists in the United States. Many auto lenders have tightened their lending policies, making it more difficult for buyers to get financed. According to Forbes, banks are lending less money to potential buyers. According to a recent analysis, the average credit score for approved new vehicle loans skyrocketed to a record high in 2017.

For auto-loaners, the recent trend is a positive development, considering the trouble that auto lenders faced when subprime vehicle loans began experiencing financial difficulties in 2016.   Auto lenders started tightening their lending standards for prime and subprime borrowers in 2016 as banks were reporting higher losses on defaulted auto loans.  An increase in borrowers who fell behind on payments as well as the declining value of used cars is also contributing to the latest development.

As positive as this may be for auto lenders, consumers are the ones who may be affected the most.  Some financial analysists are predicting consumers may receive less for their trade-ins, as well as pay even more for on down payments. This, for prime and subprime borrowers, means an end to easy auto-loan approvals.

The loans that auto lenders are selling to investors are referred to as asset-back securities. Selling off these loans enables the lenders to raise more money, which is used to originate further loans. In turn, the income from the loan is collected by the investor while the loan is paid back. Some of these lenders are using specialized companies to monitor the level of loans sold to ensure a timely payoff.

According to Forbes, a number of these negative trends in auto loans continued into 2018, but the level of deterioration has slowed down. For instance, there was an increment in net credit losses that was recorded for securitized loans in 2017. However, losses recorded on prime-risk loans remain at less than 1 percent, with a slower rate increase compare to 2016. Lastly, the report also stated that the net loss rate for 2017 was 0.73%, a surge from 0.63% in 2016.

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