By Ray Birch
LAWRENCEVILLE, Ga.—One expert is warning extending auto loan terms could be even riskier in 2020 should depreciation rates on used cars return to more normal levels, putting borrowers even deeper into negative equity.
Anil Goyal, executive vice president of operations at Black Book, told CUToday.info that used car depreciation rate that has hovered at a below-normal level of about 13% the past three to four years will rise to more traditional levels in 2020, near 16%.
Goyal recognizes lenders have been going out much longer on loan terms in order to keep payments affordable for borrowers as car prices rise, and that has contributed to more people with negative equity in their vehicles as they roll over into new loans, but he said 2020 is not the year to make this issue worse.
“The key for lenders who are extending loans beyond five to six years, like 84 months or longer, is to watch out for this higher depreciation and the impact it will have on collateral,” Goyal said.
A Sample Scenario
Goyal agreed used vehicle values have remained strong in recent years, but is forecasting that same scenario won’t continue in 2020.
“Let's look at a loan at 140% LTV for 84 months with a depreciation rate of 13%—when does it come into positive equity?” asked Goyal, before answering, “It takes 43 months for that loan to come into positive equity. Now, if you increase the depreciation rate to 16%, as we are forecasting the depreciation rate to be this year, it goes up to 51 months. So the equity appreciation is slower, and that’s something to watch out for, especially with the economy softening and a recession still being talked. The more negative equity you have on the books for a longer period, the longer you're exposed.”
Nevertheless, 2020 won’t be a pothole-filled road for used vehicle depreciation, according Goyal, who pointed to several factors he said will keep depreciation on the lower end of typical value decline. The typical range for used car depreciation is 16% to 18%.
“We think the used market is still pretty strong. There's a lot of demand for used vehicles, and the shift in interest to used away from new will continue in 2020,” said Goyal.
Strong Demand
As CUToday.info has reported, demand for used vehicle remains robust for the payments reasons reported above. The average price of a new car is now approximately $33,000. Moreover, the quality of used cars has improved, and many well-maintained cars have been coming off-lease in recent years, and that trend will continue. Finally, there are now mobile and online auto buying services for used autos, such as Fair, which have all contributed to creating a strong market.
Anil Goyal, Black Book
“It’s hard to afford a $33,000 to $35,000 new car,” said Goyal. “So, as I said, the growing interest in used, as consumers move away from new, will continue this year. We see demand for used vehicles growing.”
Further contributing to used car values, added Goyal, has been all the drivers for Uber and Lyft.
“Used vehicle demand is actually growing from ride-sharing,” explained Goyal. “You have about two-million active ride-sharing drivers in the U.S. This has become a sweet spot for used vehicles, especially the off-lease vehicles that the ride sharing drivers like.”
Pushing Down Prices
But there has been one factor pushing down used prices, continued Goyal, and that’s the large number of new 2019 model cars sitting on dealer lots near the end of the year and moving into 2020.
Goyal noted that used car depreciation picked up at the end of last year.
“Some of that is typical seasonality,” he said. “But we saw a sharper decline in used values this past fourth quarter than we typically do. New car sales have softened and with all the 2019 model cars still out there manufacturers have increased their incentives on these cars. So as the new car prices fall, so do the used.”