With the outstanding balance on US car loans now exceeding $1 trillion, Americans are clearly choosing to finance their auto purchases more than ever. Meanwhile, an ever-increasing number of Chinese car buyers are responding to dealers’ special credit deals and choosing to borrow for cars rather than pay cash.
But while Chinese consumers are clearly responding to encouragement by their government to take on a greater credit load, according to recent automotive finance news Americans seem increasingly to be seeking alternatives to the burden of auto debt.
More than 80% of US cars are currently being bought on credit, as opposed to 30% in China. But this gap is closing fast, according to a recent article in the New York Times. This represents good news for the Chinese government, which in the face of a recently slowing economy has taken pains to encourage consumers to buy more goods on credit.
International automakers have been eager to subsidize auto financing in China and are now encouraged to do so by the government’s easing of restrictions on their involvement in this market. Meanwhile, China’s domestic automakers have spent the past year establishing their own financing outlets. And with further encouragement being given to the consumer by the government’s lowering of taxes last year, it’s clear that Chinese households are ready and able to take on the burden of auto financing.
Across the Pacific Ocean, American auto dealers have seen almost record sales in 2016, along with an increased rate of auto financing. There’s been an increase across all buying sectors; although the percentage of subprime and deep-subprime loans has decreased slightly, the actual number of loans issued to people with credit ratings below 600 has increased.
But the risk of default on auto loans, whether in Asia or North America, is an ever-present threat to growth for automotive financing. China doesn’t have a reliable credit-rating system as does the USA, so establishing the exact rate of default on car loans is a tricky business. Chinese defaults became a serious problem in the late 1990s, leading to government restrictions on auto loans that are only now being eased. And as the auto credit market in China grows, means for rating credit risk have begun to develop. E-marketing giant Alibaba, for example, has put its massive data resources to work in helping to establish consumers’ reliability in paying off loans.
Among Americans, the delinquency rates have been rising. According to a recent USA Today article by Greg Gardner of the Detroit Free Press, the delinquency rate has risen across all quarters, but especially among subprime and deep-subprime borrowers; in fact, there’s been a 17% increase over 2015 in people in this sector who have failed to make an auto payment in the past 60 days.
Given the state of the market, more and more Americans are turning away from buying new cars, the price of which continues to rise. For many, leasing a vehicle has become increasingly attractive. Leasing currently represents over 31% of all new car and truck transactions in the USA. This figure is up from just under 27% in 2015, suggesting that leasing a new vehicle and holding on to it for five or six years is a desirable alternative to purchase.
As Greg Gardner suggests in his report on recent automotive finance news, within the next two to five years these leased vehicles are going to be flooding the market. This will in turn depress the price of used cars, making it necessary for consumers trading in their older cars for new ones to take out higher loans.
The result may well be a rapid increase in the already growing market for used vehicles by consumers who have high credit ratings.