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Auto Finance Companies Exposed Amid Changing Consumer Preferences

When a car dealer sells a car, increasingly there is a tail risk that follows the manufacturer through the product lifecycle. Car manufacturers and the complex financing contracts common to their captive finance companies may be exposed to risk to both preference and regulatory changes, a Moody’s report points out. The risks come on top of previous concerns regarding sub-prime auto loans and increasing default rates.

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When a car manufacturer leases a vehicle, the profitability of that transaction is not necessarily finalized. The auto finance company’s profitability is tied to the residual value of the automobile. If consumer tastes change and a leased car model falls out of favor, the finance company is left with the liability.

Moody’s analyst Jason Grohotolski and the team look at not only shifting consumer style appetites but see significant potential shifts ahead. Driving the change are forces of technology, the environment and regulation, all of which could reshape used car demand.

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