On countless occasions in recent years, the U.S. auto industry has relied on cheap and easy credit from Wall Street to get it through rough patches.
Not this time.
With both bad loans and interest rates on the rise, financial institutions are becoming more selective in doling out credit for new-car purchases, adding to the pressure for automakers already up against the wall with sliding sales, swelling inventories and a used-car glut.
“We’ve been having a party for a few years and it was fun,” said Maryann Keller, an industry consultant in Stamford, Connecticut. “Now lenders are getting back to basics.”
Many figure they have to. For one thing, subprime borrowers have been falling behind on their car-loan payments at a rate not seen since just after the 2008 financial crisis. Delinquencies for auto debt of all stripes have been climbing, with the value of those behind for at least 30 days swelling to $23.3 billion in December, a 14 percent jump from a year earlier, according to the Federal Reserve.
This helps explain why 10 percent of senior bank-loan officers said they expect to pull back on extending credit to car buyers this year, according to a Fed survey. Expectations are that terms will toughen for loans the vast majority of Americans need to buy new vehicles as the Fed boosts benchmark rates.
“There are only so many people wanting a new car and only so much capital available,” said Daniel Parry, chief executive officer of Praxis Finance and co-founder of Exeter Finance, a Blackstone Group-backed subprime lender. “Manufacturers and lenders will have to reset to reduced volume levels.”
The reset has already started, with auto sales dipping in each of the first three months of the year. In March, the annualized pace, adjusted for seasonal trends, slowed to 16.6 million from 16.7 million a year earlier, according to Autodata Corp. Analysts had projected it would accelerate to about 17.2 million. Now Goldman Sachs Group Inc. economists figure there’s only demand for about 15 million per year, they said in an April 4 report.
The industry set a record by selling 17.6 million cars and trucks in 2016 and has been on a seven-year growth streak. But General Motors Co., Ford Motor Co. and others had to pile on discounts and incentives to keep the expansion going, with both their finance arms and third-party lenders giving them a boost with easy credit.
GM expects used-car prices will fall 7 percent this year, followed by “more normalized” deflation of 2 to 3 percent per year, Chief Financial Officer Chuck Stevens told analysts during a conference call Thursday. GM will still see lending profits grow this year, he said.
Read more of the original article at Bloomberg.
