The economic slowdown that has resulted worldwide due to the pandemic has and will certainly dislodge the financial equilibrium among many. This includes the employees as well as employers. It is in fact, a chain of reactions that have snapped already in many organizations.
Studies have revealed that in the ABS or the asset-backed securities market, a considerable amount of outstanding auto loans are financed. And as far as the subprime auto loan market is concerned, it depends on the ABS market. Moreover, statistical data indicates that in 2019, subprime auto loans (approximately 25%) were found to be “securitized in ABS”.
Experts are also of the opinion that the asset-backed securities market is perhaps one of the segments in the auto industry that will suffer the most due to the Covid-19 pandemic.
Impact on purchasing power
If you are planning to take out an auto loan, before you sign on the dotted line, you must be sure that you have an avenue from where you can meet your monthly auto loan payments.
However, owing to the pandemic, many have lost their jobs after layoffs or due to businesses bringing down their shutters. As a result, unless there is productivity, you cannot expect to earn profits or even the minimal payments leave alone profits. And unless you have adequate resources to buy raw materials or meet the cost of production, you will not be able to retain your workforce.
This will necessarily lead you to lay off your workers. So, as an employee, if you have been laid off, you will not be able to afford your monthly auto loan payments. Consequently, you tend to default on the payments. And the worst case scenario is when your collateral has to be forsaken.
Small loans are better than bigger loans in the pandemic
Remember, it is not a case of small loans, where you can expect to enjoy the benefits of small loans by consolidating all your loan accounts into one and then pay off your debt. Here you are using your collateral, and the amount involved is much bigger than small loans. In fact, availing small loans and then paying them off is way easier than taking out a loan of a bigger value and then defaulting on the payments and then having the collateral forfeited during the pandemic.
Shortly, it is being anticipated that delinquencies in auto loans will increase. However, auto loan providers are trying to help out those in need by offering extensions.
Remember, similar “extension” was allowed to individuals impacted by Irma and Harvey hurricanes that shook the US way back in 2017. And these extensions were of immense help to the individuals that enjoyed the benefits of extension.
Decline in ABS transactions in Auto loan market
It is also anticipated that auto loan related cash collection for ABS transactions are set to decline in the near future. And this reduction will be mainly due to 2 reasons, namely, delinquencies and deferred payments. Most importantly, the delay will also result in carrying out the procedures that will ensure repossessions and efforts to recover from the losses.
And when it comes to recoveries, you must keep in mind that with the norms of social distancing in place, recoveries and repossessions will take more time than what it would have taken under normal conditions.
Not only that there could be weakened liquidity because the cash flow will be reduced. Borrowers might find it difficult to pay their principal as well as interest amounts together.