With signs that the values of used cars are weakening, four large auto lenders are beginning to worry that the industry is in for a rough ride. JP Morgan Chase, Ally Financial, Capital One Financial, and Wells Fargo all noted the drop in used car values during discussions of their second-quarter performance and earnings.
Richard Fairbank, head of Capital One, noted that this is not unexpected. In fact, used car prices have held at record prices for months. When that happens, there is generally only one way the market will go: the value drops.
The danger is that auto lenders are about to lose a large amount of money on used cars when borrowers default on them. When this occurs, the lender tries to sell the used car and applies whatever the vehicle sells for to the amount of the loan. In some cases, this pays off the loan, while in others, the lender takes a loss.
If used car prices continue to decline, lenders will be facing losses more and more, especially since many of those used cars will have been sold for much more than they would have been. Those with sub-prime credit will be the first to default on loans, and some already are. With this default rate rising, lenders are voicing concerns that the lending bubble is about to burst again.
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