A paper produced by analysts at the Autofacts division of PricewaterhouseCoopers (PwC) has described how, in the current post-crisis era, significant changes to consumer credit conditions and lending practices in North America are fundamentally altering auto industry volumes and norms.
The analysts note that while industry restructuring in North America often refers to large-scale change within automaker and supplier ranks, the relationship between mainstream automotive consumers and lenders has also witnessed significant transformation during the downturn.
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In particular, while lending conditions have eased over the past twelve months, many consumers are voluntarily and involuntarily absent from the new vehicle market.
‘Consumer initiatives to pay outstanding debts and/or boost savings has sparked and sustained widespread deleveraging’, the paper notes.
Additionally, a significant segment of consumers that were previously eligible for a new vehicle loan are now impeded by lenders’ limited capacity to extend financing to would-be buyers with newly tarnished credit.
The analysts say that creditworthiness will likely ‘continue to suffer downward pressure in the near-term as prolonged unemployment depletes savings accounts and consumer loan delinquency/default wreaks havoc on household credit’. Further, the cyclical problem of lending restrictions associated with non-prime credit scores inhibits consumers’ ability to rebound, PwC says.
As a result, well-qualified consumers with prime credit scores (that represent over 80% of new vehicle buyers) are delaying purchases in favour of deleveraging. Conversely, less-qualified auto loan applicants are either opting out of the light vehicle market or accepting the lending community’s compulsory push toward a used vehicle purchase.
Used vehicle sales have spiked on the combination of higher net vehicle pricing and smaller loan qualification amounts.
Lenders have also used time (loan maturity) as a structural tool to create affordable monthly payments. PwC says that typically, less than half of prime auto loans and nearly two thirds of subprime exceed 60 months, but nearly 82% of subprime loans stretched beyond 5 years in 2009 and remain elevated at 71% in 2010. Consequently, the rise in the subprime auto consumer demographic has boosted used vehicle sales as a percentage of all US sales – a trend that, given adequate supply, is expected to continue beyond 2010, the analysts say.
Even as credit markets stabilise and expand long-term, subprime buyers are not likely to penetrate the new car market at levels observed in the pre-crisis era and will continue to pay a punitive APR (Annual Percentage Rate), the paper concludes.
