Financial Impact of Defaulted Car Loans in Automotive Industry

Topics: Debt, Loan, Automotive industry Pages: 12 (3695 words) Published: February 9, 2013
The Problem and Its Background

Car loan is one of the consumer’s credits that are applied for personal use of a vehicle. This is usually unsecured and it is based on the borrower’s ability to pay. Most consumers need financing or leasing to acquire a vehicle. This paper explores how the defaulted consumer car loan affects the Philippines Automotive Industry. Base on Esquire Financing Incorporation, they seek the five C’s of credit from their borrowers which are character, capacity, capital, conditions and collateral. EFI seek into character – the individual’s credibility and reputation, as can be determined through their credit reports and personal references, and capacity – or one’s ability to repay the loan. A healthy starting capital (which may include the owner’s personal assets) and financial conditions also help make for a favorable case for the business. Car loan default is generally not good for either the borrower or the lender. As soon as a loan has been identified as default, the lender can pursue car repossession and charge off. The lender will typically take back the vehicle, may take with repossession, resell it, and charge the borrower for the balance. The lender may take this unpaid amount, place it in collections, and consider it a charge off the tax purposes. That means it is an amount of money that the lender expects to lose. Because the negative impact of a dealership closure is network wide, how manufacturers respond today is now more important than ever. This paper outlines the relationship of consumer’s financial distress against their specific impact on the automotive industry such as delayed research and development, and bankruptcy of common dealership. While the number of people who use bank financing to buy cars has gone up, the number of borrowers who have gone into default has also increased. Figures on credit cards are better, but not too rosy – with the receivables to total loan portfolio (TLP) ratio so far just slightly lower at 4.5 percent than last year’s 4.8 percent.* This is in glaring but promising contrast with Esquire’s default rate: just a little over 1 percent of its total loan portfolio (Defaults on car loans up, but borrowing to grow your business still a good idea by Esquirec).

Currently, the automotive industry is experiencing a dramatic decline since 2008 but regained its strength in 2010 being considered as the landmark year for the auto industry based on its auto sales performance according to CAMPI (Chamber of Automotive Manufacturers of the Philippines, Inc.) in new car sales and dealerships. The decline in sales created negative publicity, dissatisfied customers, limited or shuttered operations, and declining wholesale vehicle orders on the side of the manufacturer. But automotive industry is giving back its image through the years. Although these financing companies are maximizing the efforts to qualify their potential customers for financing, such as basing their decisions on analyzed loan performance and third party credit bureaus such as BAP, Trans-union, etc., there is still a possibility that a car borrower gets behind his payments.

Background of the Study
A car loan default is the failure to make an agreed upon payment to the finance company that lent the money for the auto purchase. There are always reasons for non-payment but after a certain point in time, the finance company will report the loan in arrears. It will then become part of your credit history and will affect how your credit score will be calculated (Defaulting on a Car Loan: The Effects of a Car Loan Default There are a lot of individuals who are dreaming of having their own car. But not everyone can pay a car outright cash so some people are applying for a car loans (Why car loans are crucial, to different dealership financing or Auto Company( e.g. Toyota, Mitsubishi, Honda and etc.) in order for...
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