Low baseline interest rates brought borrowing costs to historical lows, driving industry demand
Los Angeles, CA (PRWEB) June 18, 2013
The Subprime Auto Loans industry is rebounding strongly from effects of the recession, but performance still remains below prerecessionary levels. From 2008 to 2013, industry revenue contracted at a 2.0% average annual rate due to significant drops in demand for subprime automotive lending experienced during the recession and subsequent weak economic recovery. “Consumer deleveraging and spikes in automotive loan defaults and repossessions caused revenue to decline from 2008 to 2011,” according to IBISWorld industry analyst Doug Kelly. Revenue returned to growth in 2012, however, “due to a resurgence and expansion of automotive sales past prerecessionary levels, fueled by low interest rates and strong investor demand for securitized subprime auto loan securities in secondary markets.” These recent trends are expected to pick up and drive up industry revenue 2.0% in 2013 to about $7.5 billion.
Low baseline interest rates brought borrowing costs for subprime consumers to historical lows, driving up their demand for industry financing to purchase vehicles. In turn, industry firms were able to meet higher demand by selling securitized subprime loans to investors, freeing up capital on their balance sheets to expand access to credit to new subprime consumers. With interest rates dampening returns on traditional asset classes such as stocks and bonds, investors increasingly sought higher investment returns from riskier assets, such as subprime automotive securities, over the past three years, facilitating the Subprime Auto Loans industry's recovery. Says Kelly, “Historically low default and delinquency rates on subprime auto financing have also attracted investor demand, driving up total subprime loan volumes.” Higher volumes and falling losses have brought industry profitability back up to just below prerecessionary levels.
New-car sales, improving consumer finances and continued strong demand growth from subprime borrowers and investors are forecast to spur industry growth over the next five years. Faster growth will be restrained by rising interest rates, though, that will raise borrowing costs and slow vehicles sales. Still, stronger subprime borrower finances and access to credit will sustain demand growth over the five-year period that will drive up industry revenue.
The Subprime Auto Loans industry exhibits a low level of market share concentration. Due to the recent financial turmoil, concentration increased slightly. Unable to access the frozen credit markets due to tightened credit standards, many smaller firms went under, causing the number of firms to decline 10.8% and 5.1% in 2008 and 2009, respectively. Over the next five years, strong demand for vehicles and improving industry profitability will attract new entrants. Despite increasing scrutiny across the financial sector as part of the 2010 financial regulatory overhaul, low barriers to entry will encourage companies to tap into the subprime automotive lending market. Furthermore, existing firms will continue to expand their geographical foothold to take advantage of growing demand from new subprime automotive borrowers. Current major companies include Ally Financial Inc., Toyota Motor Corporation, Wells Fargo & Company Chase Auto Finance (under JPMorgan Chase) and Ford Credit (under Ford Motor Company). For more information, visit IBISWorld’s Subprime Auto Loans in the US industry report page.
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IBISWorld industry Report Key Topics
This industry includes firms that finance automobile purchases through loans and leases for subprime borrowers, defined in this report as borrowers with a credit score below 680.
Key External Drivers
Industry Life Cycle
Products & Markets
Products & Services
Globalization & Trade
Market Share Concentration
Key Success Factors
Cost Structure Benchmarks
Barriers to Entry
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