The combination of ongoing inventory constraints and historic inflation has sent vehicle values soaring, causing automotive lenders to closely monitor loan-to-value ratios (LTVs) in an effort to mitigate portfolio risk and maintain consumer credit health.
As vehicle values continue to appreciate, lenders can look to the LTVs within their portfolios to monitor a consumer’s ability to pay back their loans, Landon Starr, chief revenue officer at subprime lender Arivo Acceptance, told Auto Finance News.
“I think loan to value is a key metric from a lender’s perspective,” Starr said. It’s “something lenders definitely need to be cognizant of to ensure they are not getting into loans on drastically overvalued vehicles that are ultimately going to have extremely low valuations by the end of the term.”
Lenders have the ability and responsibility to maintain tight constraints and avoid letting “customers get themselves into anything that puts them upside down” in a loan, Starr told AFN. By closely monitoring LTVs, lenders can keep consumers out of a “very negative dynamic,” he added.
In the fourth quarter of 2021, for example, LTVs for subprime loans fell 8.4% year over year to 112.9%, according to Experian’s State of the Automotive Finance Market Q4 2021 report. However, although LTVs fell YoY in Q4, when the market starts to correct, LTVs will be on the rise as vehicle values depreciate.
Pressure on vehicle values in the market from suppressed supply may not alleviate “for a long time,” Starr said. When inventory levels rise and vehicle depreciation curves normalize, “that’s going to add exposure to consumers as far as what they owe on a vehicle that’s becoming less and less valued,” he added.
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