Garnet Capital Advisors Blog

2016 is positioned to see dips in new car prices as a result of used off-lease automobiles.

The concept of supply and demand is perfectly represented with the current situation in the world of used auto sales and loans.

Auto dealers are positioned to expect an influx of vehicles coming off lease in 2016 to 2018, after strong sales of new autos dominated the market over the past couple of years.

But demand for new autos has dimmed, leaving dealers with massive inventories of used automobiles to contend with. And what happens when there's an overabundance of product without the reciprocated demand? Prices fall.

And that's exactly what's expected to happen in 2016.

2014 experienced record leases in the automotive industry, with 3.5 million new automobiles leased in the US. Leasing grew to nearly 28 percent of sales through 2015, passing the high of 27.4 percent in 1997.

And 2015 saw record sales of vehicles, thanks largely to increased wages and an improvement in unemployment rates. Economic outlooks were more positive, and consumer spending, in general, was stronger and healthier.

But the peak couldn't last forever; the demand for automobiles was doomed to decrease at some point, which is precisely what is happening right now. Auto sales weren't as strong in the early weeks of 2016 as they were last year, which is not only affecting dealers but the US economy as a whole.

Spending on automobiles dropped $5.2 billion by December. In fact, the slowdown in auto sales has had a big effect on the GDP in Q4 of 2015, and it's paced to have a detrimental impact on 2016's first quarter as well.

While oil prices are keeping auto sales strong, the industry is still set for a cooling period. New auto sales were fueled largely in part by affordable lending and a need to replace a large inventory of old cars.

The reduced supply of used vehicles at affordable prices spawned an increased need to buy new, which inevitably drove prices of used automobiles up by 18 percent since 2007. But these conditions are starting to weaken somewhat.

Dealers have a ton of inventory to clear out, with an increasing number of vehicles coming off leases.

And while we've barely started the first quarter of 2016, it doesn't seem to look too hot from an auto sales perspective. So far this year, GM has reported a very modest 0.5% increase in sales in January, and Ford experienced a 2.8 decline from the same time last year.


Used auto loans could be a potentially profitable proposition for banks in 2016.

Economists are concerned with the effect that weakened auto sales will have on the overall economic growth in the US for the first few months of 2016.

With the competition of affordably-priced, gently-used vehicles coming off lease, new car sales and prices might suffer as a result.

We've seen this all before. Back in the 90s, auto leasing was extremely popular as automakers strived for a spike in sales. But this unsustainable high inevitably led to elevated residuals, cheaper prices on used vehicles, and inevitable losses for automakers and the banks that offered these auto loans.

It's expected that 2016 will experience a huge leap in off-lease vehicles as maturities are anticipated to increase by 800,000 units - a 33 percent jump from 2015. And such numbers are expected to increase well into 2017, with off-lease supplies anticipated to grow by another 285,000 units.

As used off-lease vehicles continue to pour into dealers' lots, prices on used automobiles will continue to dip into the near future. Not only will consumers benefit from more affordable prices, they also have the advantage of low oil prices over the next little while to fuel their purchases.

Banks Advised to Add Used Auto Loans to Their Loan Portfolios

With the current market clearly in favor of used vehicle purchasing, banks would be well-advised to start making room on their loan portfolios for used auto loans. The numbers point to a healthy market for used automobile purchases among consumers, who will need financing to complete these transactions. Having used auto loan products to offer during the next couple of years could offer banks a lucrative opportunity to boost their loan portfolios.

Finding niches that are currently underserved is a savvy way for banks to diversify and beef up their portfolios. Consumer lending has already been showing great promise over the past couple of years as Americans continue to pay down debt and be more conservative with the loans they take out.

Despite such moderate practices, their spending power is much stronger these days compared to the years following the recession in 2008, and their lending needs are thereby more active as they seek out purchases that they're comfortably able to make.

But to generate a loan portfolio to consist of these new used auto loan assets, a little bit of experience and expertise is warranted. At Garnet Capital, we make it our mission to assist financial institutions of all sizes capitalize on the opportunities that present themselves, including the potentially fruitful used auto loan assets.

Considering the fact that auto loans are relatively short in term, and tend to require collateral, they make a relatively safe and liquid asset to include on a loan portfolio.

Find out more about how Garnet Capital can help, browse our white papers today.