State of the Automobile Industry

I predict that 2009 will be even harder for the auto industry than 2008. The reason I think this is the major changes we are seeing in the credit markets. In previous years creditors loaned customers thousands of dollars more than vehicles were worth. With great credit it was possible to borrow almost twice the vehicles value or easily 140%. Now these creditors have began to realize serious loses with the contracting economy and staggering job losses. They are also having a hard time borrowing at decent rates based on their increased lose ratios. Within the last month we have seen rates jump several points and advances shrivel to below 100% of the vehicles value. This has made it difficult to finance anybody with a trade-in which they owe money on. In previous years lenders extended loan terms to 84 plus months and allowed for large advances in terms of loan to value. Therefore these customers have paid more interest and less principle during the first years of the loans. This coupled with the lowest used car values in recent history has created greater inequity for customers who have not paid off their current vehicles. Now if they want a new vehicle banks have reduced allowed terms, increased rates, and decreased the amount they will finance in terms of loan to value (LTV). Literally overnight some banks have gone from a 130% LTV advance policy to 100%. That is the difference between a customer being able to finance $6000 in inequity or $0 on a $20,000 vehicle. Some banks are now even charging up to 3% to finance up to 120% LTV which was a minimal amount a year ago. In the long term these policies are not bad because they will put customers in a better equity position than what was allowed previously. However this year many people who are used to financing vehicles with trade-ins for $0 down might have to fork over more down payment than expected. With swelling new vehicle inventories the manufactures are going to have to figure out a way to loosen credit with their captive finance sources. Just wait a week and this will probably all change....

Luckly VW has a large customer base that lease vehicles. They will be insulated from this phenomenon because the lease company assumed the risk of the future value of their vehicle. Therefore they will not have inequity at a time when used vehicle values are at their lowest and lenders are tightening up.