Auto loan extensions spiked in March in one of the first tangible effects the COVID-19 pandemic has had on the auto finance industry, according to S&P Global Ratings.
The rating agency examined prime and subprime auto asset-backed securities shelves and found that in the prime segment alone, extensions equaled 3.94% of total outstanding loans at the beginning of March — 12 times February’s level. By comparison, February extensions represented 0.33% of outstanding loans on a dollar basis.
For four subprime auto loan ABS shelves — GM Financial AmeriCredit, Santander’s DRIVE and SDART shelves, and World Omni’s Select — the cumulative extension rate doubled to 6.82% of outstanding balance, up from 1.53% in February.
Looking forward, S&P expects extensions will likely remain high for at least the next two to three months due to high unemployment levels, as well as lenders “preferring to work with their customers rather than trying to repossess and sell vehicles into a depressed and only partially functioning used-vehicle wholesale market,” the report read. In many states there are moratoriums on involuntary repos by lenders, the report noted.
Payment extensions can serve as a double-edged sword for many lenders in a stressed economic environment. On one hand, deferred payments can help keep accounts current and offer borrowers the much-needed time to financially recover from an unexpected downturn. They also serve to bolster customer loyalty by easing stress.
On the other hand, increased extensions can lead to higher credit losses and back-loaded defaults when accounts become current again, if borrowers are unable to make their loan payments. The subprime credit tier is especially at risk for higher defaults post extension.
Still, S&P and Kroll Bond Rating Agency maintain that loan extensions are viable solutions to protect asset performance.
“In moderation, extensions are a very useful tool — they maximize cash flow to the ABS trust,” Brian Ford, senior director of structured finance research at KBRA, previously told Auto Finance News. “But when they get out of hand, it can certainly be to the detriment of the ABS noteholders.”