Looser Auto Lending Practices Could Lead to More Loan Defaults

According to a recent study by wholesale vehicle auction and industry research firm Manheim Consulting, auto loan delinquencies reached a 12-year low in 2012, but that may be about to change.  A new study by Experian Automotive found that 60-day loan delinquencies rose during the fourth quarter of last year. Although auto repossessions fell by over 27 percent during the same quarter, Experian warns that the increase in delinquencies raises some red flags.

Experian Automotive’s director of automotive credit Melinda Zabritski says, “Overall, our Q4 analysis shows that the auto lending market is extremely healthy. Of course, you never want to see an increase in delinquencies, but when you take a step back and look at the market compared to where it was three years ago, we still have remarkable stability.”

Repossessions accounted for only 0.46 percent of all outstanding auto loans last quarter. However, 60-day delinquencies actually rose slightly for the first time since Q4 of 2009. Manheim Consulting’s chief economist Tom Webb thinks the number of auto repos could increase by as much as nearly 30 percent over the next two years.

Many analysts say lenders are to blame for the increase in loan delinquencies.  The Draconian lending reforms that were imposed following the near collapse of the U.S. auto industry in 2009 drove the number of loan delinquencies down more than 31 percent between 2009 and 2012.  Repossessions fell to just 1.3 million last year.

Unfortunately, however, even highly qualified buyers found it nearly impossible to get loans which resulted in the largest drop in auto sales since the Great Depression.

With the drops in delinquencies and repos, lenders began easing their terms. Looser credit helped fuel the rebound in auto sales which reached 14.5 million units in 2012, but also contributed to the rise in loan delinquencies and repossessions.

This year, auto sales are expected reach as high as 15.5 million units, driven largely by pent up demand and laxer lending practices. The hope is that more highly qualified buyers will re-enter the market, but some including Webb worry that lenders may return to their risky pre-recession lending practices.

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