By Ray Birch
RIVERSIDE, Conn.—The automotive industry is undergoing one of its most significant periods of change, with technology advancing so quickly that new cars can seem outdated to buyers almost as soon as they’re driven off the lot.
It’s a period of change that will have a significant impact on car owners, with the total cost of ownership moving higher, affecting people’s ability to manage the monthly budget. It’s also a period in which lenders must sharpen their skills to better understand collateral value projections—down to each individual model—insists one analyst.
Automotive industry expert Maryann Keller shared those insights and more with CUToday.info, emphasizing that the “house is not burning,” but that both sides—the borrower and the lender—must be prepared to meet a changing marketplace.
“Lenders have to be cognizant that we have never experienced a period of time in which automotive technology is changing so rapidly and influencing many elements of vehicle ownership,” said the principal at Maryann Keller & Associates and a former Wall Street auto industry analyst. “So lenders have to pay much closer attention to the product they are lending on.”
Make Loan On The Car
Keller said that she believes many lenders still make loans on vehicles based on their general category, such as sport utility or luxury vehicle.
“I believe they sort of assume that the car is what it was five years ago and lend on it that way,” she said. “They have to realize they are dealing with a different type of vehicle today, as well as a different type of customer.”
Keller also emphasized that lenders need to be more cautious about defaults, understanding the risk with each make and model and how each car will hold its value down the road—a value that might depreciate faster as technology becomes quickly outdated. She said defaults are a greater concern with the price of vehicles rising due to the tech and terms extending as a result, leaving many borrowers to face negative equity in their cars for a longer period.
Nothing is driving up the price of cars more than the new safety features being added, such as emergency brake assist and lane change assist, she said. Those same features are also leading to more new cars being totaled as opposed to repaired.
“We have seen probably more than a $4,000 increase in the average transaction price of a car in the last five years,” Keller said.
Maryann Keller
But the car owner has been able to mitigate the price increase due to the rock-bottom rates post recession, automaker incentives and longer terms, she said.
“The full effect of the price increase has really yet to be felt by the borrower,” said Keller.
Ancillary Services Costs Rising
But it will soon enough, Keller insisted. As rates begin to rise and also the cost of ancillary services consumers buy to protect their investment—general car insurance, gap insurance and extended warranties.
“So far what has been going on with car prices has not influenced buyer behavior much, but it will,” Keller said, saying consumers may begin to hold onto their cars longer as the higher price and longer terms—as well as the entire cost of ownership—have them “playing catch-up.”
“With rates going up and lenders now becoming more concerned about the loss severity, even when a prime borrower defaults on a longer-term loan, we are seeing two things happening. On one hand we are seeing automotive companies trying to write fewer leases because they understand there is potentially a big loss facing them when the lease matures,” said Keller, noting that the glut of high-quality used cars coming off lease is flooding the market with good used cars.
“The second thing is that rates have crept up and longer maturities create negative equity and therefore greater risk to the lender on a default, whatever the credit tier,” she said.
Keller sees all the change impacting buyer demand.
“It will get tougher as everyone pulls in their horns a little bit,” she said, pointing not only to rising rates, but also fewer lease opportunities and greater lender scrutiny of borrowers. “There will just be fewer people who can step up to the monthly payment. Now this could mean people buy less expensive cars and drop down a category. The rising cost of ownership will impact the marketplace.”
Collateral Value Projections
The new marketplace demands that lenders better understand collateral value projections. Keller said that when she was on the board of Dollar Thrifty Automotive group, the company understood its risk exposure for each type of car in their rental car fleet.
“We selected the fleet based on the cost of repair, how frequently did specific cars break down. How much will it cost us to maintain a car for 35,000 miles,” explained Keller. “We knew what colors of cars people did not want at the auctions. We knew everything about that car so we could minimize our depreciation and therefore our risk in these vehicles. It’s really a science.”
Keller does not expect lenders to go to the same level of analysis as Thrifty.
“But they have to be aware that the product is changing and the underlying market dynamics that they relied on in the past, which is high collateral value, may not be the case anymore,” she said.
With new technology in cars affecting the total cost of ownership, will the situation possibly reverse itself as the cost for some tech features comes down?
Keller does not think so, saying a primary reason the price of cars will rise is that as some features become less expensive, new ones will be added.
“Yes, technology can become cheaper. Take, for example, the airbag. When it was introduced in cars in 1989 an airbag cost $1,000. Now you can get one for 25 bucks,” she said. “But on the other hand, where are those savings in the cars we buy today?”
Technology just keeps advancing, and so will car prices, Keller said.
“Will LIDAR (light detection and ranging) become less expensive over time, sure. But there is not LIDAR technology in cars right now, but there will be,” Keller said. “Simply put, there has never been a point in time where cars have become cheaper.”