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Archive for June, 2013

Auto-Loan Delinquencies Inch Up, Prodded by Subprime Loans

People with less-than-perfect credit are receiving auto loans more easily than in the past few years, a situation propelling the rise in auto-loan delinquency rate.

The rate of U.S. auto-loans that are 60 days or more past due slightly increased to 0.88 percent in the first quarter of 2013 from 0.82 percent in the same period in 2012, showed the latest TransUnion Industry Insights Report.

The delinquency rate among subprime borrowers significantly increased from 5.09 percent to 5.50 percent, the “primary driver of the increase” in the national auto-loan delinquency rate according to the credit bureau.

TransUnion Automotive Vice President Peter Turek said that they have been watching the trend in auto loans to see whether an increase in subprime lending would spur delinquency rates on.


However, the percentage of subprime borrowers in Q1 2013 remained the same as in Q1 2012. Subprime borrowers still made up 15 percent of the total auto loan accounts this year.

“We found that while subprime borrowers are receiving more auto loans, the percentage of these loans to all auto loans made remains the same as last year so there has not been a dramatic effect to the overall delinquency rate,” Turek said.

On the contrary, auto loan balances grew by more than 6 percent from $11,266 to $12,006. The average loan balance increased by only 4 percent despite continuous growth for eight consecutive quarters. And the account balances in the subprime category rose by more than 11 percent over the last two years.

Meanwhile, the volume of all auto loans originated increased by 6.1 percent from Q1 2012 to Q1 2013.

According to Turek, borrowers are more likely to miss or be late on their payments as lenders give out more financing opportunities to people with less-than-ideal credit.

“On one hand, subprime borrowers make up a smaller percentage of the overall market and their delinquency rates are actually the same as they were two years ago. However, their account balances have risen more than $1,200 in that same period placing more of an economic burden on lenders if they were to go delinquent,” said Turek.



California Republic Bank Sells $238M of Securitized Auto Loans

California Republic Bancorp (CRPB) recently sold $238 million of notes backed by prime auto loans to qualified institutional buyers.


The third best performing bank in the U.S. also sold all the residual interests of the securitized loans by selling “the underlying ownership certificates of the securitization trust through a private placement transaction.” CRPB will still service the underlying receivables for a 1% servicing fee.

CRPB Chief Executive Officer Jon Wilcox said, “Securitizations are an important aspect of our business model, and we are pleased by the size and overall execution of this deal.”

CRPB, which has $653 million total assets in the first quarter of this year, completed securitization of some $183 million of auto loans in November 2012.

Credit Suisse and Mitchell Silberberg & Knupp were the company’s structuring agent and bookrunner and legal adviser, respectively.



Student Loans Soar, Borrowers Shy from Auto Loans, Mortgages

Rising student debt levels are weakening businesses for auto and housing markets, a recent report by Federal Reserve Bank of New York (FRBNY) showed.

U.S. student loan debt amounted to a total of $966 billion in 2012, making it the second largest debt in the country after mortgages. Student debt now surpasses auto loans, credit cards and home-equity balances.

The market share of 25-year-olds holding a student loan expanded to 43 percent in 2012 from 25 percent in 2003. The average student loan balance increased by 91 percent from $10,649 ten years ago to $20,326.

The report showed that people with student loans are less likely to take on other forms of debt such as mortgages and auto loans.

The total debt that a typical student held in 2008 was $35,559. It declined to less than $30,000 this year.


Moreover, 30-year-old borrowers (30 years is deemed in the study as the median age at first home purchase) with history of student debt are less likely to secure housing loans than those without. In 2012, the home ownership rate for those with student loans is 2 percentage points lower than those without student debt history.

Likewise, 25-year-old student-borrowers seem to be less interested now in funding their vehicle purchases with debt than those who do not have a history of repaying a student loan. Over the past decade, student loan borrowers who took out auto loans after school are down to about 30 percent from 37 percent.

According to the FRBNY report, people who took on a loan for their schooling and were able to get good education may have limited access to auto and housing markets despite their potential to earn higher income than others. This is largely due to “tighter underwriting standards, higher delinquency rates, and lower credit scores.”

“While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace,” the report concluded.



Fox News Misreports Vehicle Loan Program’s Success

Nonprofit media watchdog Media Matters for America claimed that Fox News “falsely suggested that 56 percent of car companies that received loans” from the government’s vehicle manufacturing financing program “failed.”

In its last week’s episode, Fox & Friends Sunday cited a story by Daily Caller on the Advanced Technology Vehicle Manufacturing (ATVM) loan program and claimed that 56 percent of automakers who got Federal help “fizzled.”

Co-host and Daily Caller editor-in-chief said that the government should not be in the venture capital business because they are not good at it.

Media Matters for America insisted that while some carmakers who applied for loans went defunct, most of those who received the money are still “up and running.” Only about three percent of the $7.5 billion disbursed through the loan program went to automakers that ceased operations.

ATVM, which the Department of Energy (DOE) oversees, was created to support vehicle manufacturers in building more fuel-efficient vehicles through promising technologies. The watchdog maintains that the program’s success proves that the DOE “exercised due diligence in reviewing applicants” which is in contrast with how the media often portrays government spending as extravagant.

Jalopnik, a weblog covering the auto industry, disclosed information about some of the auto manufacturers which startups died. Among others, Aptera Motors asked for a total of $259 million; the Vehicle Production Group received $50 million, and Fisker Automotive asked for $529 million but spent only $192 million.

With all the other automakers whose startups failed—about 10 out of 18 identified carmakers according to Jalopnik—all of them went bankrupt, holding massive layoffs.



Are Guaranteed Auto Loans Possible?

Yes, guaranteed auto loans are possible and they do exist in the market. Guaranteed auto loans have become popular internationally since their inception in the U.K. These loans are mainly designed to appeal to borrowers with bad credit, or those who are more likely to be denied a loan because of credit issues. A guaranteed auto loan somehow assures or “guarantees”—thus the name—the borrower that he or she can get approved for a car loan regardless of his or her credit.

In most cases, lenders would no longer bother to look at your credit report if you’re seeking guaranteed financing. What they would need to see though is some proofs of stable income among other requirements. In that case, you need to provide copies of your pay stubs for at least the past 6 months. The proof of income is quite important as this is where lenders would see how you are as a payer.


Is your income enough to sustain car payments? Are you most likely to stay in your current job at least until the loan is paid off? These are just some pointers that you also need to look at before applying for a car loan.

But before you get too excited about guaranteed auto loans that seem to give you a light of hope, consider the following aspects of the agreement first.

Higher Interest Rate
Guaranteed auto loans are highly risky for lenders, so it’s reasonable for them to charge borrowers with nonprime credit higher interest rates. However, these rates can get unacceptably high. Be aware that as a borrower with bad credit, you are a favorite of rip-off artists and abusive lenders. Before you even step into a lending office, make sure you know the interest rate you will most likely get based on your credit. You can do this by pulling out a copy of your credit report beforehand and taking note of your credit score. You can also research about the current interest rates in most lending institutions available.

Extended Loan Term
Guaranteed auto loans are seldom short. Lenders would usually require you to make payments for at least 60 months or 5 years. That may sound a good deal as the monthly payments are lower than in a shorter term. However, experts discourage borrowers in general from going for attractive monthly payments without taking the total interest expense into consideration.

Longer loan terms may seem cost-efficient at first but they will cause you to pay more interest. (You can clearly see this with the help of an auto loan calculator.) Aside from that, there is also the risk of turning upside down in your loan where your remaining balance is greater than your car’s market value.

Down Payment
If taking out a guaranteed auto loan is the only way for you to finance a car, make sure you can make at least 20% down payment. This may mean a lot of cash but it will greatly help to minimize the impact of a high interest rate on your payments and savings. If you find it hard to shell out such amount upfront, you can add the trade-in of your current vehicle, if you have any, to how much cash you have in hand. You can also save up for this ahead of time. In any event, make it a point to put some money down upon purchase of the vehicle to avoid paying excessively and heavily for your car.



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