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Declining used car prices could cause trouble for loans

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Used car prices fell by 7% in the third quarter of 2022, which sharply increased defaults. In response, one major lender has pulled back on originating new loans, while other lenders have tightened underwriting to reduce possible losses.

Trouble Brewing For Car Loan Industry
During the time of the COVID-19 pandemic, used car prices saw an unheard-of increase. It is mainly because of the microchip shortage that stalled the production of new vehicles.

According to Kelley Blue Book, the situation drove customers to used car lots, producing a high-demand environment that increased used car prices by 28% in 2021.

While prices remained higher before the pandemic, now they are starting to come down. The price has dropped by a 7% average in the third quarter of 2022. As a result of the price declines, more borrowers are now underwater on their loans, owing more than the value of their cars.

As a result, car loan lenders are already seeing an uptick in loan defaults. For Ally Financial, the second-largest car loan lender in the United States, charge-offs for retail loans doubled in the third quarter.

Although the lender projects that charge-offs will rise to 1.6% in 2023 from 1.05% in the third quarter, it notes that these rates are still below pre-pandemic levels and that there won’t be any modifications to its loan production at that time. In addition, Wells Fargo saw a rise in write-offs for car loans it generated in the latter half of 2021.

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