Charge-Offs Rise Due To Coronavirus, But Auto Loan Fundamentals Are OK, Moody’s Says

The continuing coronavirus crisis means auto lenders are likely to experience an uptick in delinquencies and defaults, according to a Moody’s Investors Service analysis of results for the automakers’ so-called “captive” finance companies.

The upshot for consumers is, Moody’s expects unemployment to peak in the second quarter of 2020 at around 15%, improving to 9.6% at the end of 2020, and reaching 7.6% in 2021. That implies auto loan charge-offs would likely peak in 2021, the analysis said.

For consumers with good credit, however, auto lending is fundamentally in good shape. Customers with good credit should continue to enjoy relatively easy access to auto loans and leases, according to auto industry analysts.

Meanwhile, auto lenders also have good access to funding to make new loans, Moody’s said. That’s in sharp contrast to the run-up to the Great Recession a decade ago, when the auto lenders had trouble raising funding.

Even with an increase in auto-loan charge-offs, charge-offs are still pretty low by historical standards. Moody’s predicted charge-offs could peak next year at nearly double the rate at year-end 2019, and still remain below 2% of average gross loans and leases.

However, a potential drop in used-car values is of concern for the captive finance companies, such as Ford Credit, Honda Finance, GM Financial and Toyota Credit, Moody’s said.

That’s because the captive finance companies control the lion’s share of leasing. Most banks don’t even offer leasing, unless it’s for a car-company partner.

In leasing, the lender retains title to the car or truck while it’s in the consumer’s possession. At lease end, consumers have the option to buy the vehicle, but most turn it in at the selling dealership. Unless the dealership buys it from the lender to resell it as a used car, most off-lease cars and trucks end up with the lender. Lenders typically sell those off-lease units at auction.

If auction prices are lower than expected, selling those off-lease units at auction can generate big losses for the captives. Moody’s said that before coronavirus, it expected used-car values to decline less than 3% this year, but now it expects about a 10% decline in used-car values in the next 12 months.