Dealers Sell Cars So Fast They Don’t Need To Borrow
Another way to deal with the global chip shortage is through auto lenders.
Supply chain issues that have plagued automakers have also been a used car price booster as buyers scramble to find vehicles – and, in turn, for auto lenders. Banks are relatively more important players in used car loans than in new car loans. Used car loans generally have higher returns. And auto loans are boosted even more because all bad debts have better collection values ââdue to higher values ââfor collateral.
Leading auto lender Ally Financial said last week it expects to see returns on retail auto creations of around 7% for the remainder of 2021, above the first quarter average. 6.66% for Ally’s current retail auto loan portfolio. Leases are also a very lucrative business when end-of-lease cars are so valuable. Ally’s average auto leasing yields have jumped from 5.2% at the start of 2020 to nearly 8.6% in the recent first quarter of 2021. That’s a nice tip when benchmark rates go down. fall.
The flawed supply chain is not good news for banks. Dealers generally borrow to finance their floor inventory. So when they can’t get cars, and the cars they get right away, it hurts the growth of bank loans. Nonetheless, there is a benefit to this: when supply increases and puts pressure on used car prices, for banks there may be some compensation in the form of faster growth in loans from consumers. dealers.
Behind the positive effects of the rise in trade-in values ââand the shift in the mix towards higher yielding products for banks, there are also less favorable general trends. Competition in auto lending can be intense, and finance companies captive to auto makers have increased their share of the used car lending market relative to banks in 2020 from 2019, according to the Quarterly Report on Experian’s auto financing. Average rates on used car loans last year were 8.4%, down from just over 9% in 2019, and the average term for used car loans reached an all-time high. last year, according to Experian. Credit risk may also reappear, although banks have generally reduced their exposure to the subprime market.
Shares of auto lenders like Ally, Capital One Financial and Santander Consumer USA Holdings are already trading at or above their highest price-to-book ratio in years. Investors should therefore think about the cycle in the longer term. But with a possible economic boom looming, growing demand for electric vehicles, and potential demographic shifts away from big cities and public transit, auto lenders likely still have fuel in their tank.
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