What is more important? Food, shelter or transport? The question is facing millions of Americans who have suddenly found themselves without jobs as April bills roll in. Their decision on what to prioritise will have ramifications for the $1.3tn US car loan market.
The sector came through the 2008/09 financial crisis in relatively good shape. It managed to avoid the wave of defaults that engulfed the housing sector. There is some logic to that. You can always move in with relatives or live in a rental if your house is foreclosed. But in much of America, you still need a car to get to work — or find work.
The current crisis is different. Not only are people out of work but a government imposed lockdown means they are by and large forced to stay at home. Making a payment on your car takes on less importance when you cannot use it. Another difference between now and 2008 is size: borrowings tied to cars have swelled 60 per cent since the financial crisis. More Americans have car loans than mortgages.
Even before the outbreak, concerns had been growing about the sector. Nearly 5 per cent of the total auto-loan balance are now more than 90 days past due, according to data from the Federal Reserve Bank of New York. That is the highest rate since 2011.
Rising default risks have put shares of companies with high exposure to the auto loan market on notice. Credit Acceptance Corp and Santander Consumer USA (a subsidiary of Madrid-based Banco Santander) are both down more than a third for the year to date. Ally Financial has shed nearly half of its value. Meanwhile, rating agency Fitch put the auto finance sector on negative outlook last month.
Some lenders are already offering forbearance to borrowers, which should help keep a lid on delinquency rates. But if the economy is slow to recover from the pandemic prepare for carmaggedon.
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