Moody’s: Car sales, and loans, ‘on fire’ as auto financing companies aggressively extend credit

Sales of new automobiles fell off the cliff during the recession as people bought used cars or delayed purchases altogether, turning to repairs and proactive maintenance to extend the life of their vehicles, deRitis said. The average age of U.S. autos in circulation is at one of the highest points of the last couple of decades, he said.

But at some point it simply doesn’t make sense to repair an old car if it can be replaced with a new one at a relatively low price, and low rate of financing. Consumer confidence may be starting to turn enough that buyers are willing to step back into the market, deRitis said.

It probably helps that manufacturers are willing to aggressively pursue buyers and extend credit. Auto finance companies, many of which are owned by the manufacturers themselves, are dominating lending with low interest rate offers and extended loan terms. As a result, even borrowers with lower credit scores can get a loan. Almost 30 percent of auto finance company loans and leases are being extended to borrowers with a credit score of less than 620, Moody’s reported.

Auto finance companies are willing to take more risks than banks, which are still struggling with the aftermath of the recession, because they can weigh in the price of the car to offset their deals.

“Think about the auto manufacturers and the finance companies as one entity,” deRitis said. “With auto financing, auto manufacturers can play a game between the cost of the auto and the financing. Even if they lose a little on the financing, they can make it up by selling the car at a higher price. They might be able to undercut the banks and worry less about risk since they can make it up in the price of a car.”

Robust prices for used cars also help to reduce auto financing firms’ risk because even if an individual defaults on a loan, the value of the collateral is still relatively high, deRitis said.