One surefire sign that the economy is rebounding is the robust growth in the auto loan industry. Where lending agencies used to be limited in their ability to take on high-risk loans, and banks had limited levels of capital to work with, now lenders are issuing more loans than ever before. According to the New York Times, 2013 will see a record-breaking year in the numbers of auto loans that were issued to borrowers, but this has come with an increase in delinquency rates as well.
Increased Numbers of Auto Loans
The no credit check auto loan industry saw increased sales throughout 2013, with companies like Ford and General Motors posting sales that were much higher than the 2008 and 2009 lows. Increased car sales buoyed the lending industry as well, as many people who are buying cars in 2013 are doing so without the high levels of savings that they had pre-recession. It will take some time for the higher salary levels and lower unemployment to trickle down to the population, so in the mean-time expect lending rates to continue to increase as people make purchasing decisions based on their current income level, but don’t have the wage history or savings to justify paying for a car in cash.
Increased Loan Amounts
Prior to the fiscal rebound, lending companies attempted to reduce their risk exposure by providing smaller loans, limiting the value of the cars that borrowers could purchase, and increase the total amount of down-payment required. When the economy began to rebound, auto dealerships pushed lenders for increased loan amounts, allowing borrowers to reduce their down-payments and increasing the amount of interest that banks were able to collect over time.
According to The Gazette, the average debt per borrower (a good measure of the size of auto loans that are being issued rose around 5 percent, good news for the lending industry and for individual lenders. With luck, the economic rebound will continue and lenders will be able to accept more and more “risky” loans from people with bad credit.
Increased Delinquency Rate
With all economic indicators pointing to an increase in the economy’s resilience, an increased delinquency rate seems like it might be pointing in the other direction. However, there are a few reasons that the delinquency rate might have bumped up. For one, some people are just now becoming delinquent (60 days or more overdue) on auto loans that they took out a year ago or more. Additionally, this delinquency statistic includes sub-prime borrowers and the expansion of the sub-prime lending market into demographics that were previously completely ignored by the lending market. Basically, all the increased delinquency rate shows lenders is that their move into these lower-income communities comes with a degree of risk, but that risk was calculated and understood well before the expansion was made.