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dear reader,
Summer is the season for road trips in the United States. This year, however, increasing pressures in the auto loan sector may cause some motorists to think twice about starting to hit the road.
High prices for used and new cars alike have forced buyers to take out larger loans for their cars during the Covid-19 pandemic. U.S. auto loan facilities hit a record $747 billion last year after an already fast 2021, according to data from the Federal Reserve Bank of New York. Total debt owed in the sector amounted to 1.56 trillion dollars At the end of March, or $93 billion higher than the previous year.
Larger monthly payments weren’t such a big deal when interest rates were low, and consumers’ finances were lined with stimulus checks and deferred student loans and mortgages. But that changed with the government backing down on stimulus packages and stubbornly high inflation squeezing household budgets.
A growing number of Americans are falling behind on their car payments, according to Moody’s Analytics. The 12-month moving average of total delinquency rates was 3.08 percent in April, the highest level since 2011.
All those with outstanding car loans are suffering. Delinquency rates range from 23 to 49 percent higher than 2019 levels, Moody’s notes. Hardest hit are those with near-first-class credit ratings between 660 and 720. Credit scores in the United States range from 300 to 850.
In other words, the largest increase in delinquency does not come from subprime borrowers. It is showing up in sub-prime borrowers whose credit ratings have shot up during the pandemic.
The easing of used car prices also means that many motorists who took out big loans during the car-buying frenzy of the past couple of years now owe more than their cars are worth. The Manheim US Used Vehicle Value Index is down 13 percent from its peak in December 2021. Negative equity — when the amount of outstanding debt exceeds the value of a vehicle — is becoming more common, according to both credit report group TransUnion and market researcher JD Power.
They found that the used car loan-to-value ratio increased to 125 in the first quarter, compared to 110 a year ago. A ratio of 125 means that the borrower’s loan is equal to 125 percent of the car’s value.
And as we’ve seen in the US commercial real estate sector, borrowers have no worries Stay away from their loans When the value of the asset is under water.
In the event of a default, the lenders can repossess the vehicle, sell it, and use the money to pay off the unpaid balance. However, the recovered capital is not enough most of the time.
Concerns that lenders will be stuck with losses have hit stock prices of financial groups with higher exposure to the auto loan market. Shares of Ally Financial, one of the largest, have fallen about 13 percent over the past 12 months and now trade at just 0.8 times book value.
Ally’s net income fell more than 50 percent during the first quarter as financing costs plunged into profit margins. I booked $446 million in appropriations. The annual net discount rate was 1.68 percent for retail auto loans compared to 0.58 percent a year earlier.
The worst could be yet to come if the United States enters a recession. This means that investors should stay away from auto loan financials until more clarity emerges on the way forward.
Other things I liked this week
Given the uncertainty of whether or not a recession is coming, I’ve given it some thought A thoughtful piece In the New York Times, it was an interesting exploration of the extent of change in the global economy.
Take a big break from a week.
Ban Kwan Yok
lex writer
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