Auto Lenders Face Longer Terms, More Negative Equity, More Risk in 2016

Longer loan terms, increasing negative equity, declining used-car prices, rising interest rates, and higher transaction prices will likely combine for a greater risk of defaults for auto lenders going into 2016, analysts for the National Automobile Dealers Association said in recent press briefing.

“Simply put, lenders have more risk today than they have ever had, from an auto loan standpoint,” said Larry Dixon, senior manager of market intelligence for NADA Used Car Guide. In a follow-up phone interview, Dixon told Auto Finance News he didn’t mean to imply risk was higher than, say, the run-up to the Great Recession.

Rather, Dixon was pointing out that with outstanding loan and lease balances approaching $1 trillion, and with the average amount financed at a record high, theoretically auto lenders have more at stake than ever before.

“The auto finance market is still pretty good, there’s just more at risk,” he said. Dixon and NADA Chief Economist Steven Szakaly, devoted a portion of the briefing to the risks posed by a rise in negative equity, increasing likelihood of default, and a longer average trade cycle between new-vehicle purchases.

“If we’re taking this cycle from what was a 36- to 48-month cycle, and now we’re turning it into a 60- or 72-month cycle, clearly long-term sales are not going to be as strong,” Szakaly said.