Bonds backed by car loans are seeing an unprecedented rise in price, reports the Financial Times (FT).
Riskier triple B groups are now trading with yields 0.7% higher than Treasuries of similar maturities, according to JP Morgan.
The incremental yield on auto loans, which represents a $220 billion market, has fallen 0.3% since its previous low in January 2020.
Yields on auto loans fell as prices rose, but interest rates charged fell only slightly. This is because there is currently a high demand among consumers for cars.
The boost comes with stimulus checks backing up customers’ bank accounts, FT writes, and delinquencies and loans written off were both down significantly in the fourth quarter, compared to a year earlier, with Ally and d Other Prime and Quasi-Prime Autos. lenders like Capital One, Wells Fargo and JP Morgan, writes FT.
Auto loans typically have a short life of around three to five years, which means borrowers typically don’t refinance. Additionally, loans also represent smaller portions of a household’s income as opposed to other common forms.
FT writes that the average yield on an Ally loan is less than 7%, while 30-year fixed mortgages are less than 3%.
In November 2020, PYMNTS reported on the trend of consumers buying cars or financing car loans online, saying it had disrupted the industry, although Patrick Roosenberg, director of automotive financial intelligence at JD Power, said said it had already been going on for quite some time. .
Forty percent of borrowers said they preferred the online method to the older in-person methods involving dealers and banks negotiating.
Banks also like the new method, writes PYMNTS, finding it faster and more secure overall, as well as the convenience of being able to receive applications at any time of the day. Loan servicing and collection are also becoming easier, which will become especially important as COVID-related loan deferrals will soon begin to expire.