Cheap auto loans to get dearer in 2011?

[Jan 3, 2011.]

 

Auto loans are someone's investments

When you borrow to buy a car, the company that lends to you doesn't generally fund the loan itself. True, it starts off by lending you the money out of its float. But then it usually packages up a whole lot of similar debts along with yours, and sells them on in the form of a bond to investors. It then uses the money it receives from the bond (which is actually an "asset-backed security" or ABS) to top up its float, pay its costs and make a profit.

You may remember that it was this process that kicked off the credit crunch, although the problems then weren't caused by auto loans but by subprime mortgages. In that case, investors believed that they were buying low-risk home loans (because the credit bureaus told them they were), and when they realized that the borrowers had almost no chance of paying them back the whole system went into meltdown.

Auto loans popular among borrowers and lenders

It's no surprise that many investors are still wary about buying mortgage-backed securities, but that caution is making them more daring when it comes to other asset-backed securities, and especially auto loans. And the relative buoyancy of car lending is one of the reasons why Toronto-Dominion Bank is planning to buy Chrysler Financial Corp. On December 21, The Wall Street Journal called the proposed purchase:

...a sign of the importance of the automotive finance business for banks seeking to boost their consumer lending profiles. With consumers still highly reluctant to go into debt amid continued high unemployment, banks have found auto lending to be one of the few areas of growth. At the same time, auto lending tends to be among the safest lending options for banks, making it even more attractive.

Cheap auto loans may not last…

December 27 saw a clash between Bloomberg, whose Sarah Mulholland seemed to propose that consumer loans are likely to get more expensive in 2011, and The Atlantic, whose David Indiviglio strongly disagreed. The argument was, to say the least, esoteric. But a couple of interesting (and comprehensible) facts fell out of it:

• Auto loan ABSs are likely to be worth $70 billion-$75 billion this year, which is close to a quarter more than they were in 2010, according to Barclays Capital


• More than two-thirds of last year's asset-backed securities sales were for auto loans


• Ford Motor Company was the largest ABS issuer in 2010, offering $9.8 billion worth of car loans

...but they're here now

Most people (this blogger included) have little idea what will happen to financial markets in 2011. Will lending get tighter or easier? Will rates go up or down? Will the recovery stall or take off?

But one thing's for sure. Today, auto loans are relatively cheap and widely available. So why not request a competitive auto loan quote right now? While you still can.

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.