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NADA Used Car Guide: Credit Conditions to Become 'Slightly Less Favorable'

April 08, 2014

The NADA Used Car Guide painted a rosy picture of automotive finance in its “2014 Used Vehicle Price Forecast” report, which was issued last week. It noted that while pent-up demand has played a major role in the industry’s recovery during the last few years, the role credit played has been largely overlooked. But change is coming, the firm noted.

Per data from the Federal Reserve, the report showed, new auto loan interest rates were at their lowest level in at least 40 years last year. And after years of recession-led deleveraging, household debt as a percent of income fell to levels not seen since the early 1990s.

“So not only were interest rates keeping the cost of borrowing very low, the anxiety of taking on more debt was greatly reduced,” the report stated.

Lender willingness to extend credit has also been high. At $850 billion, for instance, outstanding auto loan debt exceeded prerecession levels in the third quarter last year per the Federal Reserve Bank of New York, while Experian data, the report cited, showed that the below-prime share of used auto loans averaged nearly 56.7% through the third quarter 2013. That was up from 2012’s like-period average of 55.9% and essentially equal to 2007’s three-quarter average of 56.6%.

The report also cited Experian data that showed progressively higher loan-to-value ratios and the willingness of lenders to extend loan terms. The average length of new auto loans terms grew from 63 months at the end of 2010 to 65 months through the third quarter 2013. For used, terms grew from 58 to 61 months over the same period.

“The extraordinary conditions of the past few years are also clearly evident in the NADA’s credit composite, which reflects conditions based on interest rates, the ability and ease in obtaining credit, and consumer comfort with taking on additional debt,” the report noted. “Last year, the NADA’s composite portrayed credit conditions that were at their most positive level for used-vehicle prices in more than 20 years, and, by our estimation, credit has added 5% to 6% to used-vehicle prices since 2010.”

Considering the strength of today’s credit environment, the NADA said it believes conditions will begin to become “slightly less favorable” toward the latter half of the year, as the market transitions from a uniquely positive period to one more in line with historic norms.

“And while the prevailing sentiment is that rates will stay relatively flat for stronger credit tiers, they should begin to inch up for lower tier borrowers as lenders react to the heightened level of risk presented by the growing below-prime share of loan portfolios,” the report stated.

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