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Auto Sales Reach 10 Year Highs On Record Credit, Record Loan Terms, & Record Ignorance

Tyler Durden's picture




 

There’s no question about it, Experian’s senior director of automotive finance Melinda Zabritski is an optimist.

Back in March, Zabritski chided the subprime Chicken Littles of the world, noting that “whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a 'sky is falling' type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.”

Fast forward to Monday and Zabritski was back at it, this time defending the proliferation of longer average terms for auto loans in the US. “While longer-term loans are growing, they do not necessarily represent an ominous sign for the market," Zabritski said, before explaining that extending the loan term is simply the most logical way for borrowers to buy cars they can’t really afford: "Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.” 

In other words, either car buyers are overreaching as homebuyers did in the McMansion era, or the American consumer is in bad shape courtesy of a sputtering economy and barely existent wage growth. To be clear, neither of those alternatives is a good thing.

Consider the following out Monday from Experian:

The average loan term for new and used vehicles increased by one month, reaching new all-time highs of 67 and 62 months, respectively.

 

Findings from the report also showed that longer loans, those with terms lasting 73 to 84 months, accounted for a record-setting 29.5 percent of all new vehicles financed, an 18.6 percent rise over Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.

 

Long-term used-vehicle loans also broke records, with loan terms of 73 to 84 months, reaching 16 percent in Q1 2015, rising from 12.94 percent the previous year — also the highest on record…

 

The average amount financed and the average monthly payment for a new vehicle also increased to record heights. The average new vehicle loan was $28,711 in Q1 2015, compared to $27,612 in Q1 2014. The average monthly payment for new vehicles also rose, moving from $474 in Q1 2014 to $488 in Q1 2015.

 

Additionally, leasing continued to increase in popularity during the quarter, jumping from 30.22 percent of all new vehicles financed in Q1 2014 to a record high of 31.46 percent in Q1 2015.

So let’s break that Q1 data down:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

You get the idea.

Given the above, it certainly comes as no surprise that auto sales for May came in quite strong. In fact, May saw the largest MoM increase since November 2013:

 

Put simply, people are buying more cars because they're allowed to take out long-term loans at extremely low rates, and the fact that monthly payments are still hitting all-time highs suggests that borrowers are not taking advantage of these conditions to make prudent decisions in terms of what they're buying (or leasing). While all of the above might seem like a recipe for disaster, Zabritski thinks otherwise:

"Increases in vehicle financing are signs of a strong automotive market. By gaining a deeper understanding of current financing trends, lenders are able to stay competitive and better meet the needs of the marketplace, while consumers can use the data to become more educated on the different vehicle financing options and make a more informed purchasing decision."

Yes, "more informed purchasing decisions", like taking out an 84-month loan to buy a used car. 

All of the above notwithstanding, Experian would likely point to the fact that the average FICO score for borrowers financing new cars fell only slight from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that's all well and good, there's every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street's securitization machine is involved. Let's look at some numbers for consumer ABS issuance via Deutsche Bank:

The consumer ABS sector saw $16.6 billion of new issue supply in April. This reflects a modest slowdown from Q1, when the average monthly issuance amount reached $18.9 billion. Nonetheless, year-to-date issuance, at $73.4 billion, remains flat year-over-year. Auto ABS saw $7.9 billion of new paper in April, bringing year-to-date new issue supply to $38 billion; nonprime auto ABS issuance totals $10 billion year-to-date. 

So, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit), auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers. Put simply, those subprime borrowers are getting subprimey-er. Here's FT with the latest example of the deep subprime deal from Santander Consumer (which we have profiled on a number occasions, most notably here): 

When Santander Consumer USA sold a $1bn pool of subprime auto-loans this week, it made no pretence that the loans would be paid back in full. So confident was SCUSA that a big chunk of the money would not be coming back that it said it would shield investors in the lowest-rated tranche of the deal from the first 19 per cent of losses.

 

That is a lower level of protection than the Spanish bank’s US securitisation vehicle provided in its first trip to the lower reaches of subprime auto lending in March, when it offered “credit enhancement” of 25 per cent on the worst-ranked bonds.

 

(details of the above mentioned March deep subprime deal)

And Santander Consumer is hardly the worst. Recall Skopos Financial, to which we introduced readers in April. Skopos is run by a team of Santander veterans and the stats on their latest ABS offering look even worse. Note that a fifth of all loans in the collateral pool are made to borrowers with a FICO of between 350 and 500:

The implication here is clear. The auto ABS market is alive and well with total issuance expected to reach around $100 billion this year and as the competition for borrowers heats up, lenders are reducing their underwriting standards in order to make the loans needed to feed the securitization machine. 

*  *  *

But perhaps the best bubble indicator of all is the rise of the "cash out auto loan":

 

"Use your car as collateral — our equity loans can help put your car to work for you."

Ladies and gentlemen, the "cash out auto loan" is the new home equity loan. Welcome to the great American car bubble.

 

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Tue, 06/02/2015 - 18:34 | 6157251 wendigo
wendigo's picture

I only pay cash for vehicles, well checks but you get the point. Even new ones. Never financed a vehicle in my life, and don't ever wish to. 

Tue, 06/02/2015 - 18:36 | 6157261 kaiserhoff
kaiserhoff's picture

50 year car loans.

It's for the chillins...  (inheriting debt, and nothing else)

Tue, 06/02/2015 - 22:29 | 6157882 CognacAndMencken
CognacAndMencken's picture

 

Delinquency rates are declining on all consumer loans across the board. 

http://www.federalreserve.gov/releases/chargeoff/delallsa.htm

 

Interest rates on auto loans are at/near historic lows:

http://research.stlouisfed.org/fred2/series/TERMAFCNCNSA

http://research.stlouisfed.org/fred2/series/TERMCBAUTO48NS

 

Full recovery in auto sales after the 2008/9 financial crisis:

http://research.stlouisfed.org/fred2/series/ALTSALES

 

Unless you live in the backwaters of Kentucky, the auto market is doing exceptionally well. 

 

 

 

 

 

Wed, 06/03/2015 - 00:16 | 6158102 sun tzu
sun tzu's picture

Yes, subprime has fully recovered

 

Credit markets heat up as lenders push into murkier areas

http://www.ft.com/cms/s/0/a1288490-0594-11e5-bb7d-00144feabdc0.html#axzz...

 

Richard Brunelle feels trapped. The 58-year-old says he has to drive for Uber.

Brunelle got a car through Uber's low-credit finance program and needs to make money for the loan. His payments are about $1000 dollars a month, and the loan has a 22.75 percent interest rate. That means by the time Brunelle finishes the loan, he will have paid twice the price for his Kia Optima.

http://therealnews.com/t2/component/content/article/423-sam-harnett/2378...

 

Unless you lived in the backwaters of Kentucky, the housing market was doing exceptionally well in 2006. Interest rates were at or near historic lows and foreclosures rates were also at historic lows.

Hate to burst your subprime bubble, Mr car salesman.

Tue, 06/02/2015 - 19:14 | 6157400 tempo
tempo's picture

Urber,lyft are great jobs for new college grads who take out a 10 car loan and start their own business as a driver. What a great country.

Wed, 06/03/2015 - 00:18 | 6158106 sun tzu
Tue, 06/02/2015 - 20:32 | 6157622 indygo55
indygo55's picture

14.36% with "NO SCORE"? WOW!!

Wed, 06/03/2015 - 00:29 | 6158124 Dolar in a vortex
Dolar in a vortex's picture

Can I get a Porsche Panamera Turbo on Uber "black car"?

Tue, 06/02/2015 - 18:35 | 6157257 davidalan1
davidalan1's picture

Blank stare...

Tue, 06/02/2015 - 18:38 | 6157264 Yen Cross
Yen Cross's picture

  Where can I lease a 4 year old  Nissan Sentra with 80k miles or less for 72 months? Those Japanese cars run for ever, and the parts are cheap to replace.

 The REPO guy keeps denting my bumpers. ;-)

Tue, 06/02/2015 - 18:45 | 6157289 kaiserhoff
kaiserhoff's picture

I've seen Toyota trucks go 400,000.

Small trucks are efficient, unless you have lots of munchkins to hall around.  I was pissed when they stopped making the Ranger.

Tue, 06/02/2015 - 19:06 | 6157371 Yen Cross
Yen Cross's picture

   I'm not bagging on quality kaiserhoff. Most cars reach the top of their depreciation curve in 36 months. When a person leases a car they are paying for the depreciation during the time they own that car. The trade off is that they don't have to amortize the whole loan. (just the time/depreciation) for their lease term.

  Car buyers are being raped because the risk/depreciation factor is only about 36 months max. People buying used cars are paying higher rates for longer financing durations. The lenders love it because thay can repo the vehicle and resell it knowing that it isn't depreciating at the same rate, and also benefit from higher financing costs.

 

  If I had a choice I'd probably take the Toyota.

Tue, 06/02/2015 - 19:49 | 6157503 khakuda
khakuda's picture

Yes, he is right, do a Toyota, Honda or Subaru, don't do the Nissan. I have a 21-year-old nissan that runs like a champ, but sadly the new ones are not built to the same quality standards. Once they merged with Renault things quickly went downhill. No need to trust me, just look at the resale value of comparable Nissans, Toyotas Hondas and Subarus a few years down the line.

Wed, 06/03/2015 - 00:21 | 6158110 sun tzu
sun tzu's picture

Buy a 1-2 year old Honda or Toyota for 30-40% discount. Let some other fucking idiot take the depreciation hit. You can drive the car for the next 10-15 years.

Wed, 06/03/2015 - 00:32 | 6158132 Seek_Truth
Seek_Truth's picture

My advice is similar- don't worry about it being older 1-2 years:

Buy a 5-10 year old Honda or Toyota with ~100,000 miles on the odometer for a 80-90% discount. Let somebody else take the depreciation hit. You can drive the car for the next 150,000 miles.

 

Wed, 06/03/2015 - 09:38 | 6158785 FredFlintstone
FredFlintstone's picture

Hondas are great, I have 3 of them after having been a GM guy for years. However a 1 to 2 year old one costs almost as much as a new one. Also no one wants to part with a used one typically. I suggest negotiating the piss out of a new one and then drive it for as long as you can stand it and then pass it on to family.

Tue, 06/02/2015 - 18:42 | 6157274 BoPeople
BoPeople's picture

I am thinking that everyone should get a new car using a 100% plus auto loan and never make a payment.

Then what will they do?

Who is the new ACF?

Tue, 06/02/2015 - 18:46 | 6157290 kaiserhoff
kaiserhoff's picture

See Yen's post above;)

Tue, 06/02/2015 - 18:48 | 6157299 pragmatic hobo
pragmatic hobo's picture

are there any publicly traded repo companies?

Tue, 06/02/2015 - 18:50 | 6157300 Yen Cross
Yen Cross's picture

  I'm just waiting for the first payday loan shop[shark], or settlement Attorney to start advertising high risk loans to the public for excess inventory that dealers can't offload @ ZIRP + 20%.

 I can see it now. The dealership sales personnel gets paid to be demolition experts, for kickbacks from the manufacturer and insurance company.

Tue, 06/02/2015 - 18:50 | 6157306 FreeShitter
FreeShitter's picture

2007 all over again..back then it was hummers and escalades. Now it's everything.

Tue, 06/02/2015 - 18:56 | 6157329 Thunderbox
Thunderbox's picture

Local Dodge dealer is giving a free Dart with the purchase of a Ram truck.  I am sure the terms are pretty good    /s

Wed, 06/03/2015 - 09:08 | 6158678 JMT
JMT's picture

A dart car from 2015 or those piece of shit Early 1970s Dodge Darts?? Also, the Dodge Challenger & Durango have a 3 month waiting list and are being sold at 10% or more OVER window sticker MSRP

Tue, 06/02/2015 - 18:58 | 6157335 will ling
will ling's picture

  "bad things happen to good people" ! stop this shit. just end it.

Tue, 06/02/2015 - 18:59 | 6157339 Winston Churchill
Winston Churchill's picture

Just had two corporate credit cards limits doubled,totally unsolicited.

Daily offers of unsecured biz credit starting at $100K.

Feels like 2006,1999,1986 and 1972 all over again.

Fool me once...

Fool me four times .....

Its different this time though I'm sure.

Tue, 06/02/2015 - 19:05 | 6157361 Seasmoke
Seasmoke's picture

You know what to do.

Tue, 06/02/2015 - 19:14 | 6157399 Winston Churchill
Winston Churchill's picture

I always hate it when I know how the  play ends.

Tue, 06/02/2015 - 19:19 | 6157414 Yen Cross
Yen Cross's picture

  This play is pretty much in it's "last act". I hope you got some of that Cable action Winston?

 I told you the election gap would get closed. ;-)

Tue, 06/02/2015 - 19:42 | 6157486 khakuda
khakuda's picture

Me, too, but with the personal credit card. I might've called to increase the line as the letter suggested, but I was too busy watching all the new home flipping shows.

Tue, 06/02/2015 - 19:15 | 6157345 Salsipuedes
Salsipuedes's picture

But you should see me just a rollin' on down the road lookin' so coo..                            

                       SMASH!

Did I mention I couldn't afford insurance? This means I won't be able to finish my Doctorate in Economics! Cost me a quarter mil large and I just got a new repayment plan; something about my bitchin' new car, my Mom's farm, my first born and you, my fellow American.

Tue, 06/02/2015 - 19:02 | 6157348 Seasmoke
Seasmoke's picture

These numbers are truly astounding !!! And I don't astound easily. 

Tue, 06/02/2015 - 19:07 | 6157374 Yen Cross
Yen Cross's picture

 We must have some douchewad used car dealer on this thread.

Tue, 06/02/2015 - 19:08 | 6157376 Dixie Flatline
Dixie Flatline's picture

I got 84 months to pay off my Spark yo!

Tue, 06/02/2015 - 19:11 | 6157387 falconflight
falconflight's picture

90% below a FICO of 600.  Astonishing.  I could (would) have never afforded a loan payment of $488.  Saved up large down payments, and usually kept cars for 10 years at a time.  

Tue, 06/02/2015 - 19:12 | 6157392 Questan1913
Questan1913's picture

Great headline.  Ignorance is us.

Tue, 06/02/2015 - 19:40 | 6157476 B2u
B2u's picture

I don't know and I don't care...

Tue, 06/02/2015 - 19:16 | 6157405 Midnight Rider
Midnight Rider's picture

Didn't they jack up FICO scores here recently by recalculating the formula? Same bad credit but higher scores, more loans, longer loans, bigger loans, lower rate loans. This is going to end well...

Tue, 06/02/2015 - 19:31 | 6157445 q99x2
q99x2's picture

I want a hovercraft.

Tue, 06/02/2015 - 19:38 | 6157463 TeethVillage88s
TeethVillage88s's picture

Are they Economical? I thought on q99x2 they drove Chevy Sparks.

But article is timely if incomplete. Securitization is at a 65 year High.

Motor Vehicle Loans Owned and Securitized, Outstanding
2015:Q1: 972.4011 Billions of Dollars (Big surge)
Quarterly, End of Period, Not Seasonally Adjusted, MVLOAS,
http://research.stlouisfed.org/fred2/series/MVLOAS

Student Loans Owned and Securitized, Outstanding
2015:Q1: 1,355.0134 Billions of Dollars (another jump)
Quarterly, End of Period, Not Seasonally Adjusted, SLOAS,

Tue, 06/02/2015 - 19:49 | 6157504 adr
adr's picture

The numbers are seasonally adjusted, so they are pure bullshit like every other economic data point spewed by the media.

If cars are flying off the lots, why is Ford offering $4k on the hood of a Fusion. Honda is discounting $25k Accords to $19,500. Kia is offering $6500 off a 2015 Optima.

These kind of incentives aren't given out when car sales are robust. My local Mazda dealer has thirty 3s collecting dust. If you need to sell cars to sub 600 credit people with 90 month terms to move inventory, that isn't exactly a healthy market.

Why don't they pull out some of the few hundred thousand 2013s sitting in storage rotting all over the country?

Just report the real numbers dammit.

Wed, 06/03/2015 - 07:59 | 6158517 JMT
JMT's picture

they are where exactly??  From what I hear & see, the cars you mentioned are selling quickly at full window sticker MSRP + options fes & taxes..  Many dealers dont even have enough SUV's and popular models like the Honda accord to meet demand like with home buyers, car buyers are paying over window sticker MSRP + options fees & taxes

Tue, 06/02/2015 - 19:53 | 6157517 Parsecs Taxi
Parsecs Taxi's picture

Buy a used car.

Buy some used tools.

Take an auto repair class at your local community college.

Teach a (wo)man to take out a loan, and s/he drives for six years. Teach a (wo)man to fix a car, and s/he drives for life.

Tue, 06/02/2015 - 20:45 | 6157659 COSMOS
COSMOS's picture

Lol good one !

Tue, 06/02/2015 - 22:59 | 6157948 Westcoastliberal
Westcoastliberal's picture

Buy a Chilton's repair book for that make/model

Look up "how to" videos on utube

Avoid Mazda's, Fiat's, Jeep & Chrysler products.  A mid 90's to 2001 4 door sedan (I like Buicks/Olds/Subarus) with less than 90,000 miles is ideal for a driver. Easy to upkeep & decent gas mileage.

Tue, 06/02/2015 - 19:58 | 6157527 HenryHall
HenryHall's picture

Booming car sales is usally an indicator that hyperinflation is expected to arrive soon.

Car buyer hopes to repay with substantially worthless currency.

Tue, 06/02/2015 - 20:17 | 6157592 henry chucho
henry chucho's picture

Not to worry..all new vehicles are factory equiped with fail-safe devices..When you miss a payment,the vehicle locks down,the windows seal shut,and the exhaust fumes are vented into the cars interior,neutralizing all existing life forms within 15 minutes..

Tue, 06/02/2015 - 20:53 | 6157677 starman
starman's picture

When you can't afford a home a new car will do.

Tue, 06/02/2015 - 21:14 | 6157730 Soul Glow
Soul Glow's picture

Just live in your car.  Cramer did!

Tue, 06/02/2015 - 21:10 | 6157724 Soul Glow
Soul Glow's picture

Drive one last time Americans, this is the auto bubble.

Wed, 06/03/2015 - 01:18 | 6158198 Kirk2NCC1701
Kirk2NCC1701's picture

We paid off our $38,000 car in 3 years.  So fut you, Fed!

Wed, 06/03/2015 - 05:10 | 6158351 Magooo
Magooo's picture

Ah well I can beat that.  I moved to new zealand and financed a property (half cash) - the bank said do you want to roll some vehicles into that 30 yr mortgage? 

 

By the time that rolls around the cars will be collectors items and worth more than I paid for them (maybe the bank is thinking exactly that haha)

Wed, 06/03/2015 - 07:42 | 6158472 Nockian
Nockian's picture

In the UK the average price of a typical Japanese sports bike has risen by close on 100% in the last 6 years. This has all been on the back of cheap finance and long term repayments. European motorcycles have risen by around 50% over the same period.

Prices are still rising. It's an interesting new development. Credit is driving demand and not average prices. For those who have bought outright it's becoming increasingly more attractive for dealers to buy in used bikes directly, than for owners to sell to private buyers that at one time would have offered a higher price.

Motorcycles are really a leisure purchase for the average rider and not a necessary transport buy. Amazing how foolish some purchasers can be, however, for those of us that have the cash it is now proving a problem. Cash is not attractive to dealers unless the buyer is prepared to pay the full price. Meanwhile, its now difficult to pick up a bargain on the private used market. Dealers have essentially become credit outlets and lenders, the product is a secondary consideration.

It is clear that the intent of government and banks to crush savers and create a credit whirlwind. We will reap a mega hurricane.

Wed, 06/03/2015 - 09:28 | 6158739 bmr22
bmr22's picture

I used to work in the car slaes business and you would never talk total price, just what the putz could afford every month. If you notice that is how almost everything is sold now a days, by the low monthly payment. You too can be a debt slave for life

Wed, 06/03/2015 - 09:26 | 6158727 bmr22
bmr22's picture

We just bought a used Honda Element for $7500 cash only 110,000 miles on it. It should easily last us 10 years or more.

Wed, 06/03/2015 - 13:17 | 6159656 csmith
csmith's picture

Combine the easy and instant REPO process (automatic remote shutoff) with the nearly free money described in the article, and what do you get?

An historic and apocalyptic COLLAPSE in used care prices...should be here around 2018...

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