According to a new report from Moody’s, the decline in car sales in Europe is forcing auto finance companies to engage in risky transactions with drivers.
Moody’s said, “The response of auto finance originators to faltering new car sales in Europe is credit negative for auto lenders and securitized transactions,"
The reason for this is that car manufacturers in the UK and Germany have offered generous loan terms to drivers, in order to boost their sales. On Tuesday, Moody’s stated that the conditions of this sales are so relaxed that car finance companies risk losing money on loans are there is a decline in new cars sales.
According to Moody’s, this issue – easy credit being offered to customers who end up not paying toff the full loan- is beginning to enter the shores of France.
In Britain, a huge percentage of new car financing is offered through “personal contract purchase” loans (PCP). Typically, these loans allow drivers to make payments spread over a period f two or more years. When the loan period is over, the driver has three options.
- Make a balloon payment for the remainder of the loan and buy the car outright
- Get credit for the “residual value” (RV) of the car and roll the loan over into a new deal for a new car.
- Give the car back to the dealership and pay nothing more.
Carmakers prefer that driver the second option because it activates a new car purchase and a new set of interest-bearing payments from the driver.
Tuy vậy, a car finance company can lose money on the deal if the driver chooses any of the two other options. The value of the car in both cases may be less than the residual value on the loan. In other words, the value of the car would be less than the value of the unpaid portion of the loan.
The new car market and the used car market are tanking at the same time
In the UK and Europe, governments have recently begun legislating against diesel-powered car. This is making them unpopular with drivers. như vậy, reducing their value on the second-hand market. While at the same time, the sales of new cars have taken a nosedive.
Moody’s changed its outlook on global auto manufacturing industry from “stable” to “negative” in March. “Global light vehicle sales will not meaningfully recover in 2019 và 2020 after declining during the latter part of 2018,” Moody’s said today. According to data tracked by Moody’s, total unit sales declined 0.4% trong 2018 đến 16.2 triệu.
The sales declines are pushing car loan companies to offer increasingly risky loan products, Moody’s says.
Longer Loans, Greater Risk
Longer loans mean lower monthly payments, making it more attractive to the consumer. The loner loans, Tuy nhiên, make it difficult to predict the value of the car at the end of the loan. This in turn increases the chances of the companies sustaining losses. Longer loans also increase the likelihood of losses for these companies.
The longer a loan period is, the lower the monthly payments are, and the more attractive the financing looks to drivers. Tuy vậy, the longer loan periods make it harder to predict the residual value of the car at the end of the loan, increasing the likelihood of companies sustaining losses. In addition, the longer terms increase the chances of drivers returning the cars to dealerships before the loan is up, which also increases the likelihood of losses for the finance companies, Moody’s says.
“In Germany and the UK, automakers’ financing companies, known as captives, are expanding into used cars, amid saturation in the new vehicle market,” according to Greg Davies, VP-senior research analyst at Moody’s. “We also expect captives to increase origination of products like balloon loans or leases with residual value risk in other European markets, potentially forcing non-captives to riskier origination practices in order to compete.”
“Increasing the maturity to 60 months from 36 would almost triple the negative equity built into the contract at the point of VT [voluntary termination]. Importantly, the negative equity effect does not only increase the likelihood that the customer will turn in the car, but also the expected loss for the lessor after selling the vehicle,” Moody’s report says today.
Expanding Horizons?
According to Moody’s, the market for PCP-type loans in the UK and Germany is now at saturation point. Kết quả là, car finance companies have begun to explore the market in other countries. Ví dụ, in France, the equivalent of PCP loan is the “location avec option d’achat” (LOA). It is a loan with an option to buy. Hôm nay, these LOA loans make up half the French market are steadily on the rise.