Underwriting standards on auto loans will slip in 2014 as increased competition pushes lenders to take more risk, according to Moody's Investors Service.
"Auto lenders will continue their return to higher levels of risk-taking, a trend that emerged in 2013 and will gain momentum in the coming year," Moody's analysts Jeffrey Hibbs, Mack Caldwell and William Black wrote in a report today. Heightened competition will result in "ever-more generous loan terms," they said.
Losses on vehicle debt for borrowers from the least creditworthy to prime customers have held below historic norms during the past several years as the U.S. economy improves, according to Moody's. Along with low interest rates, that's drawing new lenders, the New York-based analysts said.
Loan terms to buyers with good credit started to relax "marginally" about a year ago, they said. Subprime lenders have been loosening their standards back toward pre-crisis levels for several years, leading to an increase in delinquencies in recent months, the analysts said.
Losses on asset-backed bond deals linked to the debt are expected to be contained as an improving economy offsets relaxed underwriting, according to Moody's.
The credit grader is forecasting auto sales, which are on pace for the best year since 2007, to exceed 16 million in 2014 as U.S. households look to replace old cars. Underwriting will likely get worse when purchases level off.
"Once sales begin to peak and subsequently subside, lenders anxious to maintain share and sales targets will further accelerate the pace of weaker credit originations," the analysts said.
Leases are becoming more common as lenders seek to make cars more affordable, they said. Leasing, which had traditionally been more popular in the luxury market, is taking a growing share of non-luxury sales as prices rise, according to Moody's. The percentage of vehicle sales resulting from leases surpassed 28 percent this year, up from less than 19 percent in 2007, the credit grader said.