I’ve done some analysis on mortgage prepayments before, but I’ve never looked at auto loan prepayments before. Does anyone know of any good links on auto loan prepayment research and how the factors affecting auto loan prepayments differ from those affecting mortgage prepayments? Thanks in advance!
I’m not aware of any specific studies, but doesn’t it just come down to opportunity costs? If you’re paying 2% on your auto loan and can earn >2% after-tax on your money, better to stick with normal amortization schedule. If you can’t earn an after-tax return greater than your loan, better to prepay. I’m assuming your loan interest is not tax deductible. I guess other liquidity needs could factor in as well, but thinking of it from a purely financial perspective.
As a general rule, auto prepayment rates will be much higher due to trade-ins and vehicle sales. They will also be highly variable depending on the grade of the auto loan, with subprime loans having very high prepayment rates due to repos. They will also vary for used vs new car loans, balance at origination (with smaller balances having higher prepayment rates), interest rate(high interest rate --> higher prepayment rates). So you really have to looks at a specific portfolio and consider such factors.
Are refi’s pretty rare in the auto market? I think the upfront costs usually outweigh the benefit because of the short amortization – probably requires a large downward move in interest rates to justify. I think your average Joe doesn’t have the capital to be able to make the financial decision that higgmond is suggesting. All this is pure speculation on my part, haven’t seen any research on it.
jbaldyga Wrote: ------------------------------------------------------- > Are refi’s pretty rare in the auto market? I > think the upfront costs usually outweigh the > benefit because of the short amortization – > probably requires a large downward move in > interest rates to justify. > > I think your average Joe doesn’t have the capital > to be able to make the financial decision that > higgmond is suggesting. > > All this is pure speculation on my part, haven’t > seen any research on it. You will see some refi’s on 15% APR+ loans - still very rare.
http://thismatter.com/money/bonds/types/abs/auto-abs.htm Auto prepayment speeds are relatively unaffected by prevailing interest rates because of their short term and low loan balance compared to mortgages. The other reason why auto loans are not refinanced is because the value of the vehicle falls faster than the loan balance. Hence, lenders are unwilling to refinance the vehicle unless the borrower has excellent credit. Most prepayments of auto loans occur because the vehicle was sold or traded in; the vehicle was demolished and the loan was paid off with insurance proceeds; or the servicer of the loans advanced payments for defaulted loans which the servicer expects to recover. Ironically, subprime borrowers tend to prepay more than prime borrowers because they are paying a higher interest rate and, thus, can save more money by prepaying.
thanks for the info guys. the link was definitely helpful.
I think from CFA 2 we learned that prepayments aren’t an issue in auto-loans so it’s alright to use z-spread rather than OAS. I have no idea if this theory is actually practical…
Subprime auto pools currently prepaying at 0.5% monthly ABS…out of the box deals had been prepaying at 3% if you look at 2005 vintages… Subprime borrowers dont prepay auto loans to become debt free - they simply replace the debt with other forms of financing - in this environment their liquidity is no more as home equity is gone
bernie_m Wrote: ------------------------------------------------------- > As a general rule, auto prepayment rates will be > much higher due to trade-ins and vehicle sales. > They will also be highly variable depending on the > grade of the auto loan, with subprime loans having > very high prepayment rates due to repos. They will > also vary for used vs new car loans, balance at > origination (with smaller balances having higher > prepayment rates), interest rate(high interest > rate --> higher prepayment rates). So you really > have to looks at a specific portfolio and consider > such factors. How would repos affect prepayment rates? That’s a default and recovery, resulting in a net loss, not a prepayment/curtailment.
dmnyc Wrote: ------------------------------------------------------- > Subprime borrowers dont prepay auto loans to > become debt free - they simply replace the debt > with other forms of financing - in this > environment their liquidity is no more as home > equity is gone This is probably true a lot of the time, but if a subprime borrower has a terrible rate at origination, they may choose to cash out at any time if their financial condition improves at all. The difference between auto and mortgage is more people can absorb the outstanding on their car than their house, so prepayment rates for auto are less driven by prevailing interest rates.
spierce Wrote: ------------------------------------------------------- > bernie_m Wrote: > -------------------------------------------------- > ----- > > As a general rule, auto prepayment rates will > be > > much higher due to trade-ins and vehicle sales. > > > They will also be highly variable depending on > the > > grade of the auto loan, with subprime loans > having > > very high prepayment rates due to repos. They > will > > also vary for used vs new car loans, balance at > > origination (with smaller balances having > higher > > prepayment rates), interest rate(high interest > > rate --> higher prepayment rates). So you > really > > have to looks at a specific portfolio and > consider > > such factors. > > > How would repos affect prepayment rates? That’s a > default and recovery, resulting in a net loss, not > a prepayment/curtailment. It is common to have enhancements where shortfall on repo is paid from some reserve account (up to a point). But you are correct, they are not true customer prepayments.