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Declining interest rates lead to more auto loans

Henry Kallstrom

Investing in the automotive industry – what you need to know (Part 15 of 20)

(Continued from Part 14)

Increased borrowing

The growing demand for new vehicle loans was spurred on by a decline in interest rates. Bank rates fell from 5.17% to 3.76% between 2010 and 2014.

As of 2Q14, the total outstanding auto loan amount in the US hit an all-time high of $905 billion. It grew at a compound annual growth rate, or CAGR, of 6.2%—from $711 billion in 2010.

Auto loan repayment improved significantly. This clearly indicates a turnaround in consumer sentiment. Loans that were delinquent for more than 90 days decreased from 5.3% in 2010 to 3.3% in June 2014. Also, the annual net charge-off rate—the percentage of loans that banks and finance companies don’t expect to recover—dropped from 2.7% in 2010 to 2% in 2014.

Auto loan market share

During 2Q14, banks and manufacturers’ captive finance units dominated the auto loan industry with a combined share of 62.1%. Captive finance units are owned by the auto manufacturers. They usually provide vehicle financing at lower rates compared to banks. Credit unions had a 16.7% share of the market. Typically, a credit union’s interest rates are about 1.3% lower than a commercial bank’s interest rates. This makes captive finance units and credit unions’ offerings extremely competitive.

Finance companies’ market share is being eaten up by captive units. There was 4.6% growth year-over-year, or YoY, for new cars and 15.1% growth for old cars. This is good news for auto manufacturers—like General Motors (GM), Ford (F), Toyota (TM), and Honda (HMC)—since their captive finance units contribute about 10% of their revenue.

Investors can gain exposure to the auto industry by investing in the Consumer Discretionary Select SPDR ETF (XLY). The automobile and auto components industry gets 8.56% of the funds.

The percentage of vehicles with financing increased from 80.2% in 2Q10 to 85% in 2Q14. The increase fueled captive finance companies’ growth. The average MSRP (manufacturer’s suggested retail price) in the US is $33,907.

For new cars, the 4.8% increase in finance requirements resulted in $43.4 billion growth in the auto loan market in 2Q14—compared to 2Q10. Captive finance companies held a new car market share of around 50% in 2Q14. They gained business totaling $21.7 billion in a single quarter simply by increasing the percentage of vehicles being financed.

In the next part of this series, we’ll discuss the automotive industry’s crucial role in economic growth.

Continue to Part 16

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