Assessing the Industry's Growth Spurt

There are a growing number of indicators, both subjective and objective, that point to an auto finance industry that is in full bloom. The amount of non-revolving consumer credit has continued to grow while auto dealers report that obtaining credit for borrowers, especially those with less-than-perfect credit, is becoming easier.

The days of nobody being able to obtain credit appear to be squarely in the rearview mirror.

“The world is upside-down compared to then,” said one auto dealer in an article posted on Bloomberg.com. “Today, somebody with a 500 credit score, I can get approved and in a Malibu,” which starts at $22,110.

Of course, being the paranoid skeptic that I am, and even though the unemployment rate is falling, I wonder if the industry is growing too fast, too soon. Has nobody heeded the supposed lessons learned from the financial crisis?

The auto finance industry is cyclical. The economy is cyclical. If it weren't for economic cycles, economists would be a lot less busy. It appears as though the industry is on the way up, and we'll enjoy a few years of strong profits and growth before the worm turns and we'll find ourselves back in this boat again.

If we're on the carousel and it keeps moving in circles in the same direction, can the industry grow too fast, too soon? Is an accelerated upswing a good thing for the industry? Does it mean we get to the top faster?

There was a sign on the wall in my ninth grade history classroom that said, "Those who do not learn from history are doomed to repeat it."

Quick credit for borrowers with dodgy credit histories does not seem like the industry learned its lesson. Why do you think things will be different this time?

Tags: credit, crisis, economy, recovery, subprime

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Comment by Chas Roscow on February 9, 2012 at 3:13pm: Hi Mike; this sailor has observed for 29 years the auto finance industry and I can confidently proclaim: This is precisely when the next book of bad loans goes on the books. This is a "mathematical certainty".

"When anyone asks me how I can best describe my experience in nearly forty years at sea, I merely say, uneventful. Of course there have been winter gales, and storms and fog and the like. But in all my experience, I have never been in any accident...or any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort."

E. J. Smith, 1907, Captain, RMS Titanic

Chas Roscow

Tactical Auto Training

Comment by Mark Humphrey on February 23, 2012 at 1:13pm: All great points, a great deal depends on the length of loans being booked now and what loans and aged cars these consumers are coming out of. It's better to catch the loosening credit at the inception of the "upswing" and keep all eyes on key indicators as to when the next down turn is coming. The problem obviously relies in predicting the next down turn and with the global economy is in such a fragile state right now, that leaves some big question marks as to how that will impact the US market, and more specifically automotive when that time comes. To compound the issue, if extended term loans continue to grow to keep consumer payments low this will in all likelihood prolong the cycle and also potentially increase the collateral risk of those loans. Hopefully Leo DiCaprio isn’t setting the current auto underwriting (see Titanic reference from Chas Roscow).