new Automotive Lending Trends in the united states

Longer loan terms and lower down payments. The percentage of
long-term subprime loans (greater than 60 months) soared from 45.86%
for 2004 transactions to 68.25% for 2006 transactions¡ªand then to about
80% in 2007.3, 4 Down payments on all vehicle financing declined from
19.3% of the sales price in 2004 to 16.3% in 2006.5
The financed amount compared to total vehicle value continues to rise
to historic levels. The loan-to-value ratio of total used vehicle financings
to total value of used vehicles financed has increased over the last two
years (2005 and 2006) and experts say it will continue to rise through
2010.6 In May of 2007, the loan-to-value ratio for auto loans rose to 94%
from 92% two months earlier.7 More than a quarter of those who trade
in a vehicle to purchase a new vehicle are "upside down,"with negative
equity averaging $3,930 in 2006, up $660 from the prior year.8 This puts
pressure on lenders to extend even longer loan terms to win business.
"We see continued increases in the amount of 'extended term' lending¡ª
greater than 60 months," said Jeffrey Young, President & Chief Executive,
Mitsubishi Motors Credit of America Inc. "Banks and particularly credit
unions continue to be very aggressive in carving out their unique niche
in the market by offering terms out to 84 or more months. We've even
seen some 96-month business being offered. While extended-term lending
can be helpful in the near-term for solving a customer's negative equity
or payment objective needs, over the longer term, it only exacerbates the issue


3. Lower prices. Used car prices dropped 2.2% year-over-year during
2006.1 3 The decline was attributed to increased inventories and higher
borrowing rates. Lower used car pricing may also have a negative
impact on selling repossessed vehicles, resulting in higher losses.
4. Less help from home equity. A declining housing market has also
led to weaker demand for cars, as consumers have less home equity to
draw upon. Summarizing data from Case-Shiller Home Price Indices,
two analysts noted, "Home prices have fallen at a 5% annual rate during
the past six months, now deflating in 3/4 of the country's individual
markets. In the past year, home prices decreased 2.7%, the steepest

decline in 16 years, and further declines seem certain."1 4
5. Increased charge-off rates. During the third quarter of 2006, for the
first time in about two years, there was a year-over-year increase in
charge-offs for most subprime auto finance companies. The trend
continued in the fourth quarter.
Investors and lenders in the subprime space are meticulously watching
unemployment rates for clues as to what's coming in net charge-off rates.
Subprime credit trends are closely tied to the unemployment rate, andtrends in the job market can act as a leading indicator of charge-off rates