Used car lending has grown more lucrative during the past few years, in large part due to high used-car values. As used-car values remain high, a borrower’s equity position improves, reducing the risk of loss for lenders if the need for repossession arises. Not only are values strong, but according to Experian, delinquency rates have improved across the board. Consumers have a sound incentive to pay their auto loans before most other financial obligations since they depend on transportation to get to work and around town. Although used car lending has become an attractive means of generating revenue for many credit unions, the near-record high values of used cars today will not last. In fact, in May 2012, Kelley Blue Book began to see softness in used-car values at auction in nearly all segments.
Used-Car Values Show First Signs Of Weakness
In May, 1- to 3-year-old used-vehicle values declined by 3% on average while values of fuel-efficient vehicles dropped nearly 5%. Although values have started to show signs of weakness, they remain at near-record high levels.
A lack of supply triggered by fewer trade-ins and leases due to a sharp reduction in the sale of new vehicles has propped up used car values to unprecedented highs. The average 1- to 3-year-old vehicle is worth approximately 20% more today than it was in 2009, when the market hit a low point after the onset of the recession.
From January through April of this year, values of fuel-efficient vehicles increased nearly 15% in response to rising fuel prices and in many cases, values of 1- to 2-year-old used vehicles approached original manufacturer’s suggested retail price (MSRP). But fuel prices soon peaked and subsequently declined $0.30 per gallon since early April, used-car values have started to slide as well.
Segments At Risk For Correction
Source: © Kelley Blue Book Automotive Insights.
Declines To Continue
Lenders should proceed with caution as consumers apply to finance hybrid and other fuel-efficient vehicles, and Kelley Blue Book recommends securing a more sizable down payment for borrowers with less than perfect credit. Kelley Blue Book expects further declines in used-car values moving forward, possibly as much as 6% to 7% through summer. Hybrid cars are the most at risk for correction because they remain up more than 15% since the start of the year. As fuel prices continue to decline, Kelley Blue Book expects hybrids to also decline substantially. In May, the 2010 Toyota Prius dropped more than $1,000 in value and further drops of this magnitude are expected.
As credit unions evaluate new loan applications, they should be sure to evaluate the Kelley Blue Book® Auction Value via Quick Values to ensure they know the liquidation value of a vehicle in the case repossession becomes necessary. Kelley Blue Book updates its Auction Values on a weekly basis and they are always reflective of the latest trends occurring at auctions nationwide.
In addition, lenders can review the Blue Book Market Report ─ available for download here ─ to see the latest market insights and trends impacting the industry. Published by Kelley Blue Book’s Analytic Insights team, this free e-newsletter explores the state of the automotive industry by analyzing Kelley Blue Book® Auction Values and developments in residual values on a bi-monthly basis.
Alec Gutierrez is the senior market analyst of Automotive Insights at Kelley Blue Book. He can be reached at email@example.com.
Founded in 1926, Kelley Blue Book, The Trusted Resource®, is the only vehicle valuation and information source trusted and relied upon by both consumers and the industry. Kelley Blue Book Co. Inc. is a wholly owned subsidiary of AutoTrader.com.