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In today’s edition:
🦴 Auto loan "extensions" are rising.
What it means and why it's dangerous.
🔑 Shoppers corner:
Kias and Hyundais are getting stolen. Should you still get one?
Reading time: 3:14
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🦴 Auto loan "extensions" are rising. What it means and why it's dangerous.
This past week brought another rise in wholesale prices at auto auctions. Black Book data shows that the increase is creeping into retail prices as well.
Contrary to what anyone anticipated, this trend will likely stay with us because dealers are currently selling more cars than they're buying. They can't replace their inventory quickly enough because there isn't enough supply in the market, but the demand is still strong.
Manheim estimates that used retail sales increased 16% in January from December and that used retail sales were up 5% year over year
Using estimates of used retail days’ supply based on vAuto data, January ended at 44 days’ supply, down from 56 days at the end of December.
The season of tax refunds, which usually brings higher used car sales, is here. In anticipation, dealers are rebuilding their inventories, which drives up prices.
(Not all prices are rising, to be fair: Audi, Mercedes, Volvo, and BMW show small declines from the previous month.)
However, there’s still a structural shortage of affordable vehicles caused by disruptions in the new car market in 2020-2021. Besides the reduced supply and fewer leases, manufacturers have been heavily relying on cranking out high-end vehicles to boost their profits, compensating for lower sales.
New cars prices are a disaster.
1 in 4 new cars sold in December had an MSRP over $60K.
Five years ago, that number was 1 in 13.
(via Cox auto)
— CarDealershipGuy (@GuyDealership)
Feb 23, 2023
Since car prices started their historic climb, the total dollar value of auto loans has risen at the fastest pace on record in data going back 20+ years ago. Pushed by high payments and higher APRs, buyers take out bigger loans for longer terms. The average transaction price is now almost $50K.
Source: J.D. Power
Longer repayment periods carry higher default risk. A Federal Reserve Bank of Philadelphia study found that six- and seven-year auto loans had several times the default rate of conventional five-year loans.
We are bombarded with news about people having a hard time keeping up with their sky-high auto loan payments and the rise in auto loan delinquencies and repossessions.
These are all logical consequences of some questionable lender practices that I wrote about in my previous newsletters (here and here).
For lenders, removing the “second loan stipulation”, overlooking some income requirements, or adjusting the debt-to-income approval threshold may yield short-term wins in sales volume, but ultimately will hurt both them and consumers. According to the report from Goldman, almost 20% of banks “admit” to easing credit standards for auto loan applicants in the first half of 2021, while over 10% did the same in the second half of the year.
Consumer credit scores have been inflated in the last few years by government stimuli, growing savings rate, and the relatively healthy job market. Some lenders relying solely on credit scores issued big loans to borrowers, putting them in credit situations they wouldn't have otherwise been in.
Consumer auto loans are starting to show some weakness. Delinquency is becoming an issue, especially for subprime borrowers. Bloomberg reports that the number of subprime borrowers who were at least 60 days late increased by 5.67%, up from a seven-year low of 2.58% in April 2021. (the rate was 5.04% in January of 2009, the peak of the recession).
The 6 out of 17 largest lenders who collectively carry 98% of the loans show an increase in loans that are 60+ days overdue.
Analysis by Moody's Analytics shows another worrying trend. In 2022, more than 9% of people with auto loans were at least 30 days behind on their payments, numbers that haven't been seen since just after the Great Recession in 2010.
But here’s what’s interesting…
To deal with these delinquencies, some banks are embracing another questionable tactic – loan extensions.
Here’s how extensions work: when a borrower cannot make a payment, the lender can offer to defer payments for a period from a few weeks to several months. During the deferment period, the borrower does not have to make monthly payments, but interest will still accrue on the loan. The repayment term will be extended for the same number of months as the deferment period.
The frequency of extensions for subprime loans shows notable increases as highlighted in research by a gentleman named Bill Ploog, who focuses on analyzing asset-backed securities.
On the surface, the practice of loan extension appears to be consumer-friendly: lenders show goodwill working with customers by breaking their outstanding debt into manageable chunks by offering flexible payment arrangements.
From lenders’ standpoint, it is better to collect something rather than nothing and end up repossessing a car that is worth less than its market value.
But in reality, borrowers get the short end of the stick. Because of how loans are amortized, the interest is paid before the principal. When a loan is extended, the interest keeps accumulating based on the unpaid balance, which could significantly increase the amount of interest paid over the life of the loan.
The example below shows that a borrower pays 38% more in interest by getting 5 loan extensions over 10 months:
Source: Bill Ploog
Here’s the bottom line: Lots of people have wondered (including myself) if and when repossessions will start creeping up. Defaults and delinquencies have risen, so what gives? Auto loan extensions may be the core driver buoying those loans and preventing repossessions… For now.
Lenders cannot extend these loans forever. I’ll keep you posted on what happens next.
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🔑 Kias and Hyundais are getting stolen. Should you still get one?
You can learn anything on social media these days. A recent TikTok challenge provided an educational video on how to steal a Kia using a screwdriver and an iPhone charging cable. (Video is not linked — I don’t want to give any ideas…)
Turns out Kia didn’t install an electronic immobilizer on some 2015-2019 Kia and Hyundai models. Was it the chip shortage? What can go wrong?
Immediately, tech-savvy “youths” jumped on the trend. NPR reports that in Milwaukee 3,557 Kias and 3,406 Hyundais were stolen in 2021. The NHTSA said these had caused at least eight deaths and 14 crashes in the country last year.
Some auto insurance companies, like State Farm, refused to insure these vehicles. Certain dealerships were also staying away from them because customers plainly refused to buy these cars because of potential theft.
At first, Hyundai’s suggested remedy was to sell customers a security kit for about $170. With installation and labor, the kit could cost up to $500. Another creative solution offered by the manufacturer was giving away steering wheel locks. Straight from the 80-ies.
The full scale of the problem involves about 8.3 million vehicles. Responding to all the negative publicity, Hyundai finally announced a free software patch that will require the key in the ignition before the engine can be turned on. The software also extends the car's alarm from 30 seconds to one minute.
Here’s an insider bit: I spoke to a Kia dealer and he told me that recently Hyundai sent a letter to dealers offering another dealer-installed accessory to address the issue – a GPS tracker. It may be beneficial for consumers if a stolen car needs to be tracked, but Kia touts benefits for dealers as well. In addition to geofencing the letter talks about collecting customer data: mileage, whereabouts, etc. The manufacturer suggests offering it for free to customers who opt-in. Would you sacrifice some privacy for knowing where your Kia is?
Should you buy a 2015-2019 Hyundai or Kia? I’d say yes, as long as the software patch has been installed, these cars are no more at risk to be stolen than other cars in the category.
Thank you for joining me again here on the CarDealershipGuy newsletter. See you soon!
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