Way back in 2007, when everything was going smoothly with the financial sector and everyone was buying things just to buy things (and usually reallybig things, like boats and house additions and second homes), the percentage of auto loans that were 30-days past due was around 2.50%. Now, as American consumers and finance institutions have become fiscally wiser, that percentage is back around 2007’s rate, measured at 2.52% in the second quarter.
The cumulative value of auto loans outstanding RIGHT NOW is $725 billion (data mining compliments of the auto-division of Experian; they’re the ones who calculate your credit score, the scoundrels), which is 5.7% above last year’s value, and the highest level since the first quarter of 2009.
There are a few things going on here. The first is automobile demand has rebounded (July sales were 8.9% higher than a year ago), influencing lenders to ease credit standards for new loans (the most recent Fed survey indicated that 20% of responding banks had lowered credit stipulations). As these interest rates go down, consumers are more likely to borrow because of the favorable rates. Debtor and creditors win!
When the financing cycle attains this harmony, the secondary market for the auto loans really kick in. Many of the loans get packaged with other car loans, and this super car loan gets sold off to investors. Those investors then collect all the monthly payments from the borrowers to pay off the separate loan they took out to buy the super huge auto loan.
The market for these auto-loan backed securities has rebounded significantly from the dark investment days of 2008 and 2009. Through July, $50 billion in these bonds have been issued to investors, far outpacing the total amount of $53 billion raised in 2011. Volume for these securities is 33% above 2006 levels.
This means that financiers are looking to the relatively safe-haven of auto loans for higher investment yields. Consequently, interest rates and credit standards are likely to remain low.
It’s easier for folks to make those smaller auto payments, and it feels good knowing you could drive away from your house and forget about the mortgage payment and still keep your car from anywhere in the U.S. (thank you, electronic payment).
The credit’s flowing! Go buy some cars!