By Ray Birch
LAWRENCEVILLE, Ga.—Used vehicles will likely retain their value better this year than in 2016, but that should not signal to lenders that it’s time to relax underwriting on this book of business.
In fact, Black Book contends that 2018 will be a year in which lenders must increase their focus on used car lending, paying greater attention to vehicle segments and which ones are holding their value best and which ones are not.
Noting that the pace of used vehicle depreciation has increased markedly in the last three years, coming in at 17.3% annually at the close of 2016, up from 13.2% in 2015, Anil Goyal, senior vice president of automotive valuation and analytics, said Black Book predicts used values will close out 2017 near 16.5%.
That’s an improvement from 2016, but it may mislead lenders into thinking that the pace of used vehicle depreciation is slowing, Goyal said.
“We see used value depreciation ending 2017 in the mid-16% range,” said Goyal. “But that is due to the impact of all the replacement vehicle demand from hurricanes Harvey and Irma.”
Hurricane Impact
Goyal explained that within the last month used vehicle depreciation has improved to 14.5% due to the hurricanes that struck Florida and Texas.
“We have seen a good lift in used values due to all the replacement demand,” said Goyal.
Anil Goyal, Black Book
He said small vehicle values have seen a boost as they have been more in demand from hurricane victims who are simply looking for affordable transportation.
For 2018, Goyal said Black Book predicts the depreciation rate will hit 17.5%, due largely to used inventories continuing to build as more vehicles come off-lease.
The segment hit the hardest will be luxury cars, which Goyal said is dropping in value at about 25% annually. That situation may worsen next year, he said, with a lot of high-quality luxury leases returning to the market and simply a lot of competition in the luxury car segment.
“Full size crossovers will continue to do well, because there are limited numbers of them in the market and demand for these cars is high,” said Goyal.
Subcompact cars are also dropping in value at about 25%, Goyal added, saying that is due to greater consumer focus on larger cars, such as full-size trucks and crossovers, and gas prices remaining low.
Continued High Depreciation Levels
Bottom line: Lenders should underwrite for continued levels of high depreciation, said Goyal. But what they need to do, he said, is pay much closer attention to depreciation by segment, as that is varying at a greater degree than in the past.
“Lenders need to correctly account for the higher depreciation on their books, for example, in luxury cars,” he said. “Lenders today need to get the best data and monitor depreciation trends among particular vehicle segments.”
Goyal said that type of analysis would certainly affect decisions on term length. Noting that negative equity has become a growing problem among consumers, Goyal said that close analysis of depreciation among segments might lead a lender to go out longer on a full-size crossover that is holding its value, and shorter on a luxury car.
“If the underlying asset is depreciating at a faster rate than the paydown of your principal, you are upside down for longer period of time,” said Goyal. “So it is very important to know what the depreciation trend is for each particular vehicle. We are finding more lenders are using residual values to understand what the value of the asset would be in 12 or 24 months, and understand how long it will take to get to positive equity. They are beginning to analyze and make better decisions to determine how depreciation rates impact the lifetime value of that car.”
Just as consumers are paying more attention to vehicle history data before they make a purchase, lenders, too, should make vehicle history reports part of the lending decision.
“Consumers are looking for a more precise vehicle valuation that includes vehicle history data, such as past accidents,” said Goyal, adding that Black Book will soon introduce a new vehicle valuation service that incorporates vehicle history.