Wednesday, 21 January 2015

US auto loans fuel concerns

There have been increasing concerns that US auto loans may become a source of problems for the financial system. From the Wall Street Journal earlier this month:

Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire.

“It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics.

One problem is that many of the auto loans are subprime, that is, being made to borrowers with low credit scores. Honda’s US sales chief John Mendel said in an interview last week that competitors are doing “stupid things” to boost auto sales, including making 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value.

However, Bank of America Merrill Lynch’s Michael Hanson said in an October note to clients that auto loans are not a threat to the financial system, being a much smaller proportion of household debt than mortgages.

Still, they are an additional risk to a financial system that is still reeling from the Swiss bombshell last week.

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