A Look Back at 2020: Top 3 Things in Auto Lending Industry

If the economy does not change quickly, many borrowers will not be able to meet their payments because they will not have any equity in their car, therefore repossessions will see a spike.

FREMONT, CA: Want a recap on what went on in the car lending industry this year? Below are the top three things that happened in 2020 in the car lending business and tips to help the financial institution succeed in 2021.

1. Global Consumer Confidence Index Declines Sharply

According to the research organization, in 2020 Q2, the Global Consumer Confidence Index dropped significantly from a near-historical peak of 106 in Q1 to 92, suggesting that there were more pessimistic consumers than positive globally for the first time since 2016 (a reading below 100 is considered negative). The 14-point decline is the largest quarterly decrease since the index started in 2005 Q1 and doubled the largest drop in the index through the global financial crisis in 2008-09.

2. Longer Loan Terms Can Be a Troubling Sign for Lenders

Financial companies usually offer auto loan terms ranging from 24 to 72 months. However, one pattern that the industry has seen in recent years has been that financial institutions have issued loans for a much longer period. In fact, 84 months is not an extraordinary time for borrowers.

While interest rates are low, new car loan payments and loan terms are now at an all-time high due to the increased cost of new vehicles and low (or no) down payment.  If the economy does not change quickly, many borrowers will not be able to meet their payments because they will not have any equity in their car, therefore repossessions will see a spike.

3. Subprime Auto Lending Reaches Eight-Year Low

According to a market report, the subprime segments of the auto finance sector have reached their lowest point in the last eight years at 8.01 percent. The last time this occurred was in 2011 when the figure was 8.02 percent. New subprime loan originations amounted to 10.28 percent in Q2 2019, representing a 2.27 percent year-over-year decline. Deep subprime loan originations are still at the lowest in eight years, at just 0.37 percent for this year.

In short, more loans are being made to primary borrowers. Credit scores are increasing for new funding. As a result, with more loans being made to prime borrowers, the default risk to lenders could be smaller. Of course, the margins are smaller, and lenders can make less money on prime borrowers than on subprime borrowers, but this is the right strategy for these unpredictable times.

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